Malaysia's reform drive faces stubborn obstacles

Malaysia's reform drive faces stubborn obstacles

KUALA LUMPUR (Reuters): Malaysia has taken steps to woo foreign investors, but analysts said loan defaults and high interest rates will discourage fund managers from rushing back into the market.

They said Malaysia has started making the right moves to court investors, from raising the ceiling on foreign stakes in telecommunications companies to closing down ailing stockbrokage firms.

"I think these developments are developments in the right direction, and are the type that will build confidence in Malaysia," said a senior analyst at a foreign brokerage.

But lingering concerns over the health of banks and expectations that interest rates will remain high for the foreseeable future are giving fund managers second thoughts, analysts said.

Unlike Thailand, Indonesia and South Korea, Malaysia has not had to seek help from the International Monetary Fund despite weak share prices and a depreciated currency.

But it has taken a page out of the IMF's primer with market liberalization, tougher regulations and high interest rates. Telecommunications Minister Leo Moggie announced last week that the ceiling on foreign stakes in local telecommunications firms will be raised to 61 percent from 49. The government had already raised the ceiling to 49 percent from 30 in February.

But foreign shareholders will have to cut back their holdings to 49 percent within five years, Moggie said.

Prime Minister Mahathir Mohamad announced yesterday that the government was giving American International Group Inc (AIG) five years to meet a requirement that it dilute its 100 percent stake in its Malaysian unit.

Earlier Malaysia had threatened to force AIG to sell a 49 percent stake by the time a World Trade Organization agreement on financial services takes effect next year.

The Securities Commission said on Saturday it will not allow stockbroker Omega Securities Sdn Bhd to carry on trading as it failed to meet basic liquidity requirements.

On March 23, the Kuala Lumpur Stock Exchange took charge of stockbroker Halim Securities for violating trading guidelines.

While the moves added to the stock market's short-term jitters, analysts said that over the longer term the steps would help restore confidence in Malaysia's regulatory system.

Interest rates have been allowed to rise steadily since July. The benchmark Kuala Lumpur Interbank Offered Rate stands at around 11 percent against nine percent in July.

Broad money supply is also growing at a slower pace. M3 money supply in March grew by 13.7 percent year-on-year, compared to 21.0 percent in March 1997. M1 money supply in March contracted by 11.3 percent compared to a growth of 18.9 percent in March last year.

"The M3 decrease is good news for the economy as a whole, but the negative growth in M1 is going to be bad news for the stock market," said an economist at a foreign brokerage.

The announcement that Rashid Hussain Bhd had clinched financing for its three billion ringgit ($820 million) acquisition of ailing Sime Bank Bhd from Sime Darby Bhd was also hailed by analysts.

PhileoAllied Bank Bhd's last-minute decision to help Rashid finance the deal was seen as a sign the government is getting serious about forcing consolidation among banks.

But nagging doubts persist.

High levels of non-performing loans (NPL) at banks continue to crimp confidence, analysts said. They estimate NPL levels to be between 15 and 20 percent of total outstanding loans in the financial sector.

"My gut feel is that all this won't change the asset allocation models of fund managers in the immediate term," the senior analyst said, referring to the government's moves to restore confidence.

A dose of political uncertainty in a country known for political predictability is compounding concerns.

Hong Kong-based Political & Economic Risk Consultancy (PERC) said in a recent report that in just nine months, Malaysia had gone from its best ever political risk rating in June 1997 to its lowest rating in March 1998.

PERC started the evaluation system in 1994.

The study said Mahathir's grip on his United Malays National Organization (UMNO) party had weakened, and the government was vacillating over economic policy.