Bank, corporate reforms key to Malaysian revival

Bank, corporate reforms key to Malaysian revival

By Eileen Ng

KUALA LUMPUR (AFP): Despite signs of stability in its moribund economy, Malaysia must hasten the pace of banking and corporate reforms if it wants to fully restore investor confidence, analysts say.

The imposition of restrictive capital controls last September has paid off, with all economic data now indicating the recession is bottoming out.

But whether foreign investors return depends in a large part on the government's overall economic policy and efforts at banking and corporate reform, analysts say.

In a partial easing of controls and what was seen as a first step back into the free market, the government last Thursday ended a one-year holding rule for foreign funds in the equity, bonds and property markets.

Foreign investors, previously trapped by the rule, can now sell their securities and remit proceeds ahead of a September deadline by paying an exit tax of up to 30 percent of the principal sum.

This is to be eventually phased out and replaced with a capital gains tax on all funds invested in the country from Feb. 15.

While the exit tax is not surprising, it marked a policy shift and is likely to be the "first in a series of creeping deregulation," said Kate O'Donoghue, economist with Singapore- based Barclays Capital.

"The ultimate outcome is likely to be a return to economic orthodoxy and eventual removal of capital and exchange rate controls," she said.

The government has predicted a rebound this year after Malaysia in 1998 entered its first recession in 13 years.

But, opposition leader Lim Kit Siang said "caution and reserved international reaction to the exit tax shows that Malaysia is not out of the woods."

Lim charged that the government had failed to gauge the magnitude of the damage the strict curbs had caused to foreign investors' confidence and called for further loosening measures.

But the central Bank Negara Malaysia has said the curbs would stay until there was stability and regulation in the global financial system.

Under the restrictions, the ringgit is fixed at 3.80 to the dollar and its external convertibility abandoned.

An opposition coalition known as Gagasan has urged the government to "implement a wide range of structural reforms," warning the current curbs had "lulled us into the complacency of believing that all is well."

Investment houses concur, saying Malaysia's banking system, along with the highly-leveraged corporate sector, remain the main concerns.

"Given the corporate level of indebtedness, still-subdued domestic consumption and lack of export momentum, Malaysia will not likely be able to grow its way out of its problems," Goldman Sachs Investment Research said in a recent report.

"Corporate and bank restructuring are crucial if the economy is to regain its footing and start on a clean slate."

The research house said it had upgraded the Malaysian banking sector from "market underweight" to "market weight," following significant progress in the pace of reforms.

The state-backed agency set up to absorb bad debts is now managing almost 22 billion ringgit or about 30 percent of total non-performing loans (NPL), with plans to buy up another 20 percent by June, it noted.

Another government agency has injected 4.55 billion ringgit of fresh capital into nine financial institutions.

"Malaysia has already completed the hardest tasks -- system- wide NPL carve-outs and the recapitalization of ailing financial institutions," it said.

But it called for further mergers in the overly fragmented financial sector, including "outright closures of unviable players" as well as management and credit policy reforms.

ABN-AMRO Bank noted that the banking system was still in "severe distress. The credit crunch in Malaysia is likely to remain severe and economic recovery modest."

The central bank has pledged that banking mergers would go ahead, saying details of a tie-up between state-owned Bank Bumiputra Malaysia Bhd. and Bank of Commerce Bhd. would be finalized soon.