Malaysia keeps markets guessing

Malaysia keeps markets guessing

By Nelson Graves

KUALA LUMPUR (Reuters): Malaysian Prime Minister Mahathir
Mohamad is on the verge of easing five-month-old capital
controls, but financial markets are still guessing what form the
new measures will take.

Government officials said Mahathir had been presented with at
least two alternatives for relaxing the controls which halted
international trade of the ringgit in September and locked up all
foreign portfolio investment for at least one year.

Both options would involve the imposition of an exit tax on
foreign funds taken out of the country.

The exit tax would replace a rule that bars foreign firms from
taking the principal of their portfolio investments out of the
country before Sep. 1, 1999, or 12 months from the date of
investment, whichever comes later.

Mahathir himself told 28 foreign fund managers this week that
the government was considering an exit tax.

Government officials said the Treasury had completed a review
into the income tax implications of the proposed measures, and
the competing proposals had been sent back to Mahathir for his
evaluation.

Speculation spread like wildfire through markets on Wednesday
that the government would announce the exit tax that evening,
before Mahathir left for Switzerland to address the World
Economic Forum.

But no announcement came. "It's with the PM," one government
official said. "The PM has to think about it."

Analysts who asked not to be identified said an announcement
was expected any day. The exit tax is expected to be graduated,
with a higher rate being applied to short-term investments.

For weeks, speculation had it that the top rate would be 30
percent. But analysts and government officials said the top rate
now was expected to be 20 percent, tapering off to zero.

The 20 percent rate was expected to apply to investments held
for zero to three months, with lower rates applicable to longer
periods and no tax after 12 months, they said.

The major unanswered question, they said, was whether the tax
would be on the flow of capital or capital gains.

"The assumption has been that the tax would be on capital
flows," an analyst with a foreign securities house said.

"That would be administratively feasible, but investors would
be unhappy. Now it appears there may be a graduated tax on
profits."

A graduated tax on profits might appeal to foreign investors,
but analysts said it could be a nightmare to administer.

"A tax on profits would be more acceptable to investors, but
in terms of discouraging the outflow of capital, it would be less
effective than a tax on capital flows," another analyst said.

A crucial consideration could be whether Malaysia will be
readmitted into the Morgan Stanley Capital International (MSCI)
Developed Market series once an exit tax is in place.

Malaysia was removed from the series on Sep. 30 after imposing
the capital controls, on the grounds that they limited the
repatriation of investment proceeds.

Malaysia was also removed from the MSCI Emerging Markets Free
and All Country Free series at the end of November.

"If the red tape is complicated, it could discourage a whole
chunk of investors and they would have to do more cajoling of
MSCI," an analyst said. "It has to be something effective."

Another analyst said: "Without a tax on capital, there are no
capital controls. I think a tax on profits is unlikely."