Reality check for Malaysia's stock market experiments
Reality check for Malaysia's stock market experiments
By Lim Say Boon
SINGAPORE: Today, Malaysia will resume trading of the
hitherto-frozen Clob shares -- Malaysian stocks traded over the
counter here until the implementation of capital controls in late
1998 -- thus ending an 18-month saga which had undermined
seriously the country's standing with international fund
managers.
But the rehabilitation of Malaysia is far from complete.
Indeed, the country, which had outperformed other regional
markets in the earlier part of the year, is about to witness the
limitations of its experiment with capital controls, exit taxes
and fixed exchange rates.
At the time of the introduction of capital controls, I argued
the measures were legitimate in buying time for orderly
restructuring. But I also warned then that over the longer term,
they encourage insularity and complacency, and erode
competitiveness.
Today, when the very people who criticized those controls are
now extolling their virtues, let me sound the warning loudly and
clearly: As a result of the distortion of market signals,
Malaysians are in dire danger of hearing only their own voices.
And, in the process, ignoring the rapidly-growing demand by
investors for market solutions and the depoliticisation of the
economy and corporations.
To its credit, Malaysia has replaced the more rigid regime of
capital controls with exit taxes. But the currency remains fixed.
And more importantly, the time and comfort bought by government
interference in market forces resulted in the belief that
Malaysia can continue to beat the market.
Yes, the critics were proven wrong on capital controls, and
the economy has staged a remarkable turnaround. But the breathing
space bought by government intervention has been filled with even
more intervention.
The "Malaysian way" appeared vindicated by its equities
market, which only a few months ago defied the gravity of
plummeting regional markets and even the Nasdaq.
But this was a mirage. It was as much about the sea of
liquidity dammed behind the walls of capital controls as about a
one-off adjustment by funds to Malaysia's scheduled re-
instatement to the Morgan Stanley Capital International (MSCI)
indexes. It had nothing to do with what international fund
managers really thought of Malaysia.
Portfolio fund inflows have since reversed -- and the Kuala
Lumpur Stock Exchange Composite Index (KLCI) is stagnating. With
the one-off adjustment to MSCI out of the way, Malaysia now faces
the real test of whether it can continue to thumb its nose at
international markets. Chances are, it does so at considerable
risk to its economy and capital markets.
After all, nothing has changed since April or May to explain
the loss of momentum in the stock market. If anything, economic
indicators are going from strength to strength. After an
impressive turnaround from a 7.5-percent contraction in 1998 to
5.4-percent growth last year, the economy managed yet another
stunner -- a blistering 11.7-percent growth in the first quarter
of this year.
Industrial output has also been surging -- at 23.8 percent in
that same quarter and 18.6 percent in April. The country is
likely to finish the year with its GDP some 6.5 to 7 percent
larger than when it started.
And that growth was achieved with very little inflation. Year
on year, inflation is now running at 1.3 percent. That was for
May. For the first five months of the year, we are looking at a
figure of 1.4 percent year on year.
Malaysia's trade balance also continues to run strongly in its
favor, piling up the country's external reserves.
So why is the market not continuing its rally? Or, for that
matter, why are foreign direct investment proposals running below
pre-crisis levels?
This takes me back to my earlier point about the dangers of
suspending market judgments. For starters, international
investors were uncomfortable with the manner in which Clob was
"resolved"' -- that is, with the narrow range of alternatives and
the serious fees -- estimated at nearly US$80 million -- going to
the sponsor of the "final solution", Akbar Khan.
Then there was the apparent political obstruction to SingTel's
proposed investment in Time Engineering. Time's boss, Halim Saad,
needed the money, but Prime Minister Mahathir Mohamad did not
seem too happy with SingTel -- so the deal was called off.
Then there is the use of public funds for DIY solutions to
debt and other corporate problems. Shortly after SingTel was
tossed out of Time Engineering, state-owned fund Khazanah stepped
into the void.
Now, Khazanah's name has popped up in a long-standing standoff
between auto group Hicom and state oil-company Petronas over the
former's proposed sale of car distributor EON to the latter.
Khazanah is now, apparently, considering buying EON off Hicom --
another member of that narrow corporate circle that makes up
Malaysia Inc.
Then there are the policy flip-flops over the rationalization
of the banking sector, and of stock brokers. And what about the
recent change in chain-listing rules, which are now more
accommodative of IPOs of subsidiaries planned by politically-
connected conglomerate Renong to resolve its debt problems?
Beyond that, international market opinion has been cool for
some time towards Malaysian corporate practices. Last week's
market disappointment over the US$85 million in inter-company
loans this year from Berjaya Sports Toto to Berjaya Land would
not have helped much.
Then there is the sometimes bizarre and often odd circus of
events that never seems far from Malaysian politics.
This is not a criticism of the government, nor of ruling
coalition leader Umno. It is a comment on the apparent Malaysian
obliviousness to the slack jaws that often greet news about its
politics outside the country.
Economies can get away with suspending market realities for
only a limited period of time. Take interest rates. The trapped
liquidity -- a product of capital controls -- played a major role
in bringing them down. With a declining Kuala Lumpur Interbank
Offer Rate, the KLCI, not surprisingly, surged.
But with all that liquidity, it is only a matter of time
before inflation starts picking up -- especially now that
domestic consumption is starting to strengthen. And with that,
interest rates will reverse, possibly as early as end of this
year.
To complicate matters, Malaysian interest rates may start
rising at a time when the rest of the world is just getting over
the peak of their interest-rate cycle. The market will not be
real happy if that awful scenario were to play itself out. As I
said, you can suspend market reality only so long.
The writer is a director with OCBC Investment Research Private
Limited. The views expressed above are his own.
-- The Straits Times/Asia News Network