Mon, 26 Jun 2000

Slack investment worrisome for Malaysia

By Sabyasachi Mitra

KUALA LUMPUR (Reuters): Foreign investors are shying away from Malaysia while it drags its feet on corporate reforms, depriving industry of capital and technology needed for long-term growth.

Foreign direct investment (FDI), jolted by the regional currency crisis of 1997-1998, is below pre-crisis levels despite a solid economic rebound.

"While all the other headline numbers are back to pre-crisis levels, FDI is still not there," said Khatina Nawawi, an analyst at SG Securities.

The Malaysian International Development Authority reported slack investment over the first four months of 2000.

Total proposed foreign investment in terms of manufacturing applications received between January and April fell to 1.64 billion ringgit (US$432 million) from 1.94 billion ringgit in the same period last year, Nawawi said.

"If you look at the year-to-date numbers, it is still anemic, suggesting clearly that there isn't a pickup in FDI particularly for new manufacturing projects," said Prasenjit Basu, chief economist for Southeast Asia at Credit Suisse First Boston.

FDI declined by 29 percent to 9.0 billion ringgit in 1999 from 12.6 billion in 1998.

"FDI is not picking up. This means technology transfer may not occur at a sufficient rate to sustain growth around 7.0 percent," SG Securities said in a report.

"This problem is particularly acute in key sectors such as telecommunications and finance, where large capital requirements may limit indigenous corporates' ability to keep up with intense global competition."

Basu said a slowdown in foreign investment was worrying as it could choke off access to technology, a driver of future growth.

Foreign investors are put off by slow corporate reform, stalled privatization and cronyism, analysts said.

"There is a deep suspicion that cronyism has not been totally purged after the crisis," said Eddie Lee, regional economist at Vickers Ballas in Singapore.

"Over a long-term perspective there is a cloud over Malaysia's commitment to corporate restructuring."

Philip Dingle, president of the Malaysian International Chamber of Commerce and Industry (MICCI), said a backlog of civil court cases "is starting to threaten the legal bases in which we do business".

Malaysia's backpedaling on regional trade liberalization has also raised questions whether it will stand up to the challenges of globalization.

Prime Minister Mahathir Mohamad recently asked his Southeast Asian neighbors to reconsider plans to open up the region's car markets as liberalization could hurt its domestic producers.

Analysts said that while governments across the region are relaxing their control over industry, Malaysia is tightening its grip and rescuing debt-laden private firms.

State investment agency Khazanah recently moved to take a stake in beleaguered Time Engineering Bhd, muscling out Singapore Telecommunications Bhd.

"It certainly did not send the right signal, particularly to the big players in the new economy and investors from Singapore," said an economist at a local investment bank.

Singapore was the third largest foreign investor in 1999 after the United States and Japan.

Economists said foreign firms with operations in Malaysia were pumping in additional funds to expand facilities.

"Existing players are expanding and adding capacity. There has been steady small investments from Singapore firms in electronic components and computer peripherals," Basu said.

He said imports of capital goods have risen in recent months, indicating that investment by existing firms was gathering steam.

The Ministry of International Trade and Industry wants to draw high value-added investment to increase competitiveness and productivity.

Analysts said many existing multinational firms in Malaysia were re-allocating resources to high value-added products and moving low value-added products to countries like China and India where the cost of production is cheaper.