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.