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Sep 30, 2001

Malaysia's Prime Minister Faces Difficult Times

By Angela Mackay

-- There is no love lost between George Soros and Malaysia's prime minister, Mahathir Mohamad. The hedge fund manager extraordinaire-turned-philanthropist accuses Mahathir of running a corrupt and repressive regime to keep his cronies wealthy. The Malaysian leader says Soros is a vulture who preys on vulnerable economies to make a profit.

Each is right in his own way. Mahathir runs one of those dubious regimes dressed up as a democracy and Soros admitted (10 days ago in Hong Kong) that when he ran a hedge fund he did so to make money, not to improve the world. In fact, the United States-based businessman appeared to enjoy flailing himself. He also said markets are amoral and that he did not contribute at all to society by running a hedge fund.

Anyway, the Malaysian ringgit was definitely in Soros's sights in 1998 and he went for it, resulting in Mahathir shutting the economy to outsiders and fixing the currency to the US dollar.

Until last week, little had really changed since. But, last Tuesday the government said it would spend $1.1 billion to boost a sluggish economy in danger of slowing even more after the attacks on New York and Washington, and lowered its forecast for this year's growth to 1 percent. Moreover, the central bank cut its key interest rate for the first time in more than two years.

Something had to be done because, with the currency pegged, all the pressure was being taken on asset prices. The local stock market index, for example, has fallen 10.8 percent since the attacks on America.

Corporate reform has been slower than other parts of the region, probably because Mahathir has been so protective of vested interests. The prime minister could not risk inflicting the drastic pain experienced by his neighbours in Thailand and Indonesia for fear that his government of almost two decades might topple. After all, that's what has happened to all the Asean countries surrounding Malaysia, so why should Mahathir be immune?

Hence, the preference for slow change. But there are signs that even this sacred cow must go. The country's Corporate Debt Restructuring Committee said last week it expects the numbers of bankrupt companies to rise as global growth slows. This is bad news for companies and even worse news for the banking system, which has been plugging leaks and slushing money around the system to give the impression of prosperity.

The committee has assets worth about $10 billion to try to sort out. A few days ago there was a breakthrough of sorts when creditors of Malaysia's two rail firms agreed to a plan to convert $1.4 billion of overdue loans into bonds. The government plans to acquire 80 percent of Kuala Lumpur's light rail system, leaving the rest with Renong, Taylor Woodrow, state-run pension funds and other shareholders. The bail-out will be cheaper for the government than initially planned because, by guaranteeing the bonds, it will pay creditors a lower coupon rate.

The takeover will have a twofold effect: slash about 10 percent off the country's $16 billion worth of bad loans which stem from the 1997-98 financial crisis in east Asia and help banks stem a decline in profit as the economy slows again.

In August, the committee set a three-month deadline for banks and their debtors to submit plans for their bad loans and up to one year for implementation as it seeks to cut the $7.9 billion owed by some of the country's biggest companies. But the global slowdown is complicating Malaysia's plan to clean up as much as $8.7 billion of overdue debt.

Meanwhile, Mahathir has a difficult political balancing act to stage. He wants to crush any Muslim fundamentalist movements in his country, but he cannot afford to isolate the growing number of Muslims in Malaysia who want a greater say in government. Just over half the population are Muslim; the rest are of Chinese and Indian extraction.

Recently, Mahathir jailed the son of the spiritual leader of the country's biggest Muslim political party. Nik Adli was accused of plotting to topple the government to establish Islamic rule across the region via an armed struggle. He was also said to have trained with the Afghani military in the early 1990s.

Mahathir has lost the confidence of many middle-class Malaysians and a majority of Muslims. Economic hardship will exacerbate that. The last thing the prime minister wants is to make Soros a happy man, but the choice may not be his to make.