Malaysia sets strategy ahead of general elections

Malaysia sets strategy ahead of general elections

KUALA LUMPUR (Reuters): Malaysian Prime Minister Mahathir Mohamad meets foreign fund managers this week as pressure mounts on the government to relax currency controls ahead of general elections.

The meeting, expected on Monday, is part of a government plan to try to pull Malaysia out of its first recession in 13 years in time for the polls, which must be held by April 2000.

The deep recession has stirred political waters and stands as one of the biggest challenges Mahathir has faced since he came to power in 1981, politicians and analysts say.

Mahathir blames the recession on foreign speculators who dumped securities and the ringgit, prompting the government last September to curb capital outflows and peg the ringgit to the U.S. dollar.

But he is re-examining the currency controls to attract foreign investment needed to help generate economic growth.

Few expect the wholesale dismantling of the controls that set Malaysia apart from Thailand, Indonesia and South Korea. Those three nations turned to the International Monetary Fund (IMF) for rescue packages while Kuala Lumpur stood its ground.

With foreign investment flowing back into Thailand and South Korea, Malaysia is now considering tinkering with the controls.

Foreign fund managers have been pressing Malaysia to relax a rule that bars the repatriation of the principle of portfolio investments before September 1, 1999, or one year from the date of investment, whichever comes later.

After an initial meeting with fund managers in December, Mahathir said he was prepared to consider replacing the one-year holding rule with an exit tax on portfolio investments.

A government official recently said the exit tax would probably be announced in the first quarter of 1999. Analysts expect the government to impose a graduated tax which would penalize short-term investors.

An official said on Friday that the government was still on track to impose the exit tax, but it was being reviewed by the Finance Ministry to make sure it complied with tax rules.

This week's meeting with several dozen fund managers was organized by Salomon Smith Barney, recently retained by the government as an economic adviser.

Among those expected to attend Monday's meeting are representatives of J.P. Morgan, Prudential Investments and Jardine Fleming Holdings, the Sun newspaper said on Sunday.

Mahathir is looking for assurance that foreigners will not rush to pull out their estimated $10 billion in investments once the one-year holding rule is relaxed, analysts said.

Singapore-based market consultants I.D.E.A. said most analysts forecast that about 25 to 30 percent of the $10 billion would flee the country.

The government points to the 230 percent rise in the Kuala Lumpur Stock Exchange's blue chip index since September 1 as a sign of growing confidence in the economy.