January 2002

MALAYSIAN MALAISE HAS INVESTORS RUNNING SCARED

ERIC ELLIS, Kuala Lumpur

WHOEVER said investing in Malaysia is not a political risk is not following affairs in Kuala Lumpur too closely these difficult days.

The sudden recent ousting as Finance Minister of Daim Zainuddin, Prime Minister Mahathir Mohamad s long-time friend and mentor, has foreign investors scrambling to protect themselves as Malaysia s so-called blue-chip companies become somewhat discoloured in the turmoil.

Blue-chip in corporate Malaysia does not only mean big, sector-dominant public companies. With the economy in the grip of politically well-connected businessmen, the term has come to mean the companies which have often been favoured by cosy deals and government bail-outs.

But with Daim suddenly exiting and the increasingly unpopular Mahathir taking over his crucial finance portfolio, Malaysian business has been thrown into chaos, with once-tight alliances unravelling and investors patience being tested as companies resist reform.

An ominous sign came in May when the big German bank Bayerische Landesbank Girozentrale demanded that KL-listed property developer Land & General, controlled by young Daim protege Wan Azmi Wan Hamzah, pay back US$14.8 million (£10.5 million) in loans by the end of last month.

The Germans will have been lucky to see any cash. The stricken Malaysian company says it is constrained to meet the demand. In plain English, it does not have the cash.

The German bank has been one of the first movers against the once stellar performers groomed by Daim and Mahathir to lead a golden age of Malaysian capitalism. A week earlier, it seized on the well-connected transport group Hicom, joining a handful of foreign and local banks in filing a suit in the Malaysian High Court against a Hicom offshoot for allegedly failing to meet $193 million in debt commitments.

Moves like this seem portentous for Malaysia, which doggedly refused to join Asian neighbours like Indonesia, Thailand and South Korea in seeking International Monetary Fund assistance after the financial crisis. At worst, lenders and investors are sending a message that Malaysia s heavily-patronised system has reached its sell-by date.

The post-crisis buzzwords in Asia are corporate governance and transparency and, says William Pitman, portfolio manager with Henderson Global, fund managers now expect companies to abide by the rhetoric.

Fact is that investors are so heavily underweight in Malaysia but a lot of it is still caveat emptor because you can never quite know what is going on, says Pitman. I would imagine some pressure on the Daim-linked companies if he really is on the outside now.

The disaffection is taking an inevitable toll on the economy. Malaysia s stock market is Asia s worst performer this year, down 20%, while gross domestic product growth has slowed to virtually zero by some estimates. Mahathir has become Finance Minister in Daim s absence, and that is also worrying investors.

And there is renewed downward pressure on the ringgit fix of M$3.80 to US$1, despite Mahathir s strident defence of the peg in a defiant speech to the United Nations in Tokyo last month.

THERE has been more bad news recently. Management consultant KPMG released a survey that revealed what many have long suspected about corporate Malaysia it is riddled with corruption.

KPMG blamed poor internal controls for fraud being experienced at 62% of the 143 KL-listed companies polled, about a fifth of the exchange's total listings.

The firm said the most common frauds were secret commissions and kickbacks. For the moment, the Malaysian economy seems rudderless, even sclerotic, as the leader-ship seems more consumed by politics and less by economic management.

The turmoil comes as 76-year-old Mahathir, who appointed himself Finance Minister while scouring his party s thinning senior ranks for Daim s replacement, again cracks down on dissent, arresting and jailing a number of opponents.

Now Malaysians are starting to question the legacy of Asia s longest-standing ruler a man Margaret Thatcher once famously said would have been lethal with a handbag.

He has been in office since 1981 and is 18 months into a four-year term. The wily Mahathir has helped levate Malaysians to one of South-east Asia s highest standards of living.

But many, including some of his own supporters, are increasingly saying it is time for the old political warhorse to move on or blood a competent successor to guarantee that legacy.