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.