Malaysian financial markets wait on new policy thrust

Malaysian financial markets wait on new policy thrust

By Madhav Reddy

KUALA LUMPUR (Reuter): Malaysia's battered financial markets are expected to remain volatile until investors see hard evidence that government pledges to cut spending are put into practice, analysts said.

The nation's stock and foreign exchange markets rebounded dramatically last Friday after Prime Minister Mahathir Mohamad unveiled plans to delay several multibillion dollar construction projects, including a controversial dam in the rainforests of Borneo.

He also said a plan was being drawn up to cut imports, especially of luxury goods and machinery, and scrapped recent curbs on share trading which had spooked investors.

His announcement represented a retreat from what Malaysian authorities had promised would be "economic war" against foreign speculators, and fueled the biggest one day gain in four years in the benchmark share index.

The blue-chip Kuala Lumpur Stock Exchange Composite Index jumped 12.37 percent, or 90.47 points, to 821.59 last Friday. The ringgit recovered to around 2.95 to the dollar at last Friday's close from an all-time low of 3.0520 a few hours before Mahathir's announcement.

However, analysts said the markets would now be looking for evidence the government's promises would be acted on.

"We have heard these promises before," said an economist with a U.S. bank in Singapore.

The head of research at a Malaysian brokerage said: "The markets reacted because this is what they wanted to hear -- cut spending. Now they want to know if the issues will be addressed through policy."

The lifting of the trading restrictions was good short-term, he said, but added: "The key issues of what are the medium and long-term strategies still need to be addressed in the budget next month."

He expected markets to remain volatile until the annual budget for 1998 is unveiled on Oct. 17.

Economists have demanded that Malaysia cool its economy, which has grown on average by over eight percent for a decade, in order to cut a burgeoning current account deficit.

"The key right now would be the willingness to cut imports. If the market sees an effort to reduce imports of luxury consumption goods (and) postpone major infrastructure projects, it would benefit the trade balance as well," said Andy Tan, economist with MMS International in Singapore.

The relatively level tone adopted by Mahathir last Friday was in sharp contrast to a mix of threats and bravado he employed earlier in a bid to stem the markets' freefall, which he blamed largely on foreign manipulation.

Analysts said last Friday's recovery would be viewed suspiciously by investors who had pulled out.

"I think a lot of foreigners have been flushed out. Once you are out, it is difficult, particularly for long-term investors, to reverse their decision," said an analyst who advises several foreign funds from Kuala Lumpur.

"I don't think they (funds) like the way these announcements are coming," he said, referring to a subsequent statement by Mahathir at the weekend that big projects could be speeded up if the economy recovered.

The confusion caused by such seemingly contradictory statements could render any recovery in stock prices unsustainable, the analysts said.

Some said last Friday's surge in stock prices could have been due to heavy buying by state-controlled funds at the direction of government.

Mahathir said last Saturday, however, that some foreign fund managers were returning to the market.

More than 12 foreign fund managers, who met government economic adviser Daim Zainuddin last Friday and Saturday, had expressed interest in returning to the stock market, he said.

"I don't like the way stocks recovered so strongly. I would like to see a gradual recovery and the Composite Index making a clean break from the downward trend," the Malaysian brokerage research head said.

He would consider it a "clean break" if the index could stabilize above 1,000 in the next month.

The index has lost about 34 percent this year since early July as contagion from Thailand's economic crisis spread through the region.