Malaysia's economic policy questioned

Malaysia's economic policy questioned

By Sabyasachi Mitra

KUALA LUMPUR (Reuters): Malaysia's short-term growth prospects are glowing now, but some analysts worry it may lag behind competing Asian economies in the long term unless it pursues deeper, more painful microeconomic reforms.

Investors are being put off by a fixed ringgit exchange rate, slow corporate reforms, stalled privatisations and perceived cronyism, the analysts say.

There is also a perception among analysts that the authorities are sitting too comfortably on the laurels of a strong economic rebound.

Before the economic crisis of 1997-1998, Malaysia was seen as a progressive reformer ahead of its southeast Asian neighbors and walking in step with South Korea and Taiwan.

"But after the crisis it has fallen behind in reforms even compared to some of its neighbors," said Eddie Lee, economist at Vickers Ballas. "It must act fast as it still has time on its side".

"Malaysia is doing quite well and it's only second to South Korea in terms of growth rate," he added.

Malaysia's gross domestic product (GDP) expanded by 8.8 percent year-on-year in the second quarter, higher than Singapore's 8.0 percent, Taiwan's 5.43 percent and Indonesia's 4.13 percent in the same period.

But South Korea grew at a torrid pace of 9.6 percent year-on- year in the April-June quarter.

Malaysia's central Bank Negara says that full year growth, fueled by strong exports and private consumption, will be significantly higher than the official forecast of 5.8 percent.

A latest Reuters poll of 10 research houses estimated Malaysia's GDP to rise by 9.2 percent during the year and moderate to 6.2 percent in 2001.

"What we are seeing in Malaysia is a cyclical recovery and very little of structural recovery," said Bhanu Baweja, regional economist at IDEAglobal.com.

"It is countries like Taiwan, Hong Kong, China and Korea which are attracting more foreign investment than Malaysia because of their policies," Baweja said.

Foreign investment applications in Malaysia recovered sharply in June and July after stuttering in the first five months. But the quantum of investment is still below the pre-crisis levels.

"It's not risks. It's a case of missed opportunities," said Chia Woon Khien, chief analyst at SEB Merchant Banking.

Malaysia's strong economic fundamentals offered the government a window of opportunity to push ahead with painful micro economic reforms, mainly in corporate and financial sectors and, move to a higher growth trajectory in the long-run.

Analysts say the debt overhang in the corporate sector is still high and many firms have been postponing a clean-up by just rolling over the loans.

Aviation firm Naluri Bhd, which owns 29 percent of national carrier Malaysian Airline System Bhd, in May deferred re-payment of 1.0 billion ringgit in debts and extended the maturity period for some of the debts for five years.

"The government intervention is too high and it is there even at the company level," said an economist at an investment bank.

State-investment arm Khazanah Nasional in July extended a lifeline to debt-laden telecommunication firm, Time Engineering Bhd, by buying up to 30 percent of Time's telecoms unit.

In May, Time broke off talks to sell a stake to Singapore Telecommunications, the island nation's largest listed company, a move which some say could choke off vital technology and funds to the telco firm.

While governments across the region are relaxing their control over industry, Malaysia is tightening its grip and rescuing debt- laden firms.

"The peg is symptomatic of the inertia that has crept in the system," Eddie said. "All the original reasons for the peg have disappeared".

Analysts say Malaysia's strong economic fundamentals gives it the flexibility to relax its controversial two-year-old fixed exchange rate to boost investor confidence.

The absence of a clear roadmap on the peg could drive investors to other competing regional economies.

But the central bank, which estimates the peg is undervalued by between three to four percent, says the peg will stay for a long, long time and has showed no inclination to re-think it.

Analysts have called for an open debate saying the benefits of the peg will soon start to fade and it's time to take a re-look at the exchange rate policy.

Malaysia pegged its currency at 3.8 units per U.S. dollar in September 1998 during the regional economic crisis and imposed capital controls to stem the outflow of short-term capital.