http://www.businessweek.com/magazine/ content/01_50/b3761140.htm

DECEMBER 10, 2001

INTERNATIONAL -- ASIAN BUSINESS

Is Mahathir Finally Cracking the Whip?

His cronies in limping Malaysia Inc. get the word: Restructure

Just like every other Southeast Asian "tiger" nation back in the early 1990s, Malaysia Inc. grew fast and borrowed big. By the time everything began falling apart in the financial crisis of 1997-98, the pile of bad corporate debt added up to $34 billion, most of it owed by the big conglomerates that dominated the Malaysian corporate landscape.

Since then, the government of Prime Minister Mahathir Mohamad has allowed the companies, which are mostly run by cronies from his ruling United Malay National Organization (UMNO), to ignore the debt, avoiding desperately needed bankruptcies and corporate restructuring. The bad loans have dogged Malaysia's banks and hobbled the country's ability to finance the next stage of growth.

Now Kuala Lumpur may be ready to bite the bullet. With the regional economy going from bad to worse, it is clear that Corporate Malaysia will not be able to grow its way out of debt. So the companies are starting to make progress toward restructuring. Conglomerates are selling money-losing subsidiaries, and cronies are being forced off corporate boards. "Things are happening," says an economist in Kuala Lumpur, "and that's clearly cause for optimism."

SHAKEUP AT RENONG. The trigger for this burst of activity is the continuing deterioration of Malaysia's economy. Standard & Poor's says gross domestic product has been contracting since January. Mahathir admitted in late November that Malaysia is in recession.

So the government has concluded it needs lean, debt-free corporations to compete for future global business. Take the case of engineering and construction conglomerate Renong. Long run by party insider Halim Saad, it has been a showcase of what's wrong with Malaysia Inc. Saad abruptly resigned along with several other board members in an October shakeup. In late November, Renong's new board hired J.P. Morgan Chase & Co. to advise it on restructuring and approved a plan to sell two subsidiaries, Commerce Asset-Holding, a financial-services firm that owns Commerce Asset Bank, and Cement Industries of Malaysia. The only prospective buyer so far is Kazanah Nasional, a state-owned investment vehicle.

Renong may now be forced to deal with the $6.5 billion in debt it hasn't serviced since 1998. The debt is now being administered by a government agency called the Corporate Debt Restructuring Committee. Anything but aggressive until now in forcing debtors to restructure, the CDRC has recently been taken over by a new CEO with a mandate to clean up all of its loans by yearend. "There has been a lot of tough talk lately," says an economist in Kuala Lumpur.

There are also encouraging signs at investment holding company Technology Resources Industries. In October, the Securities Commission, Malaysia's stock market regulator, rejected a restructuring plan by Chairman Tajudin Ramli that would have let him retain management control by selling stock to Naluri, another firm he controls. Instead, analysts expect Ramli to lose control to the government. The message: Officials have stopped doling out favors.

STALLING? The state-run asset management company, Danaharta Nasional, which holds an additional $12.6 billion in nonperforming corporate loans, has also stepped up its activities. On Dec. 20, Danaharta plans to sell $156 million in four-year bonds backed by resuscitated loans, part of a new plan to sell off the debt overhang as rapidly as possible.

All very promising, but some caution is in order. So far, few companies are being closed or heavily restructured; instead they are being sold to the government, which plans to clean up their debt and resell them to private investors. Kazanah may soon buy additional subsidiaries of Renong and other ailing conglomerates.

Skeptics suspect that Mahathir and the corporate chieftains are just playing for time, hoping for a rebound that will spare them the gruesome task of shutting down factories and laying off thousands. Maybe so. But some see a real shift in attitude. "I wouldn't say it's a sea change," says Ping Chew, an analyst at Standard & Poor's in Singapore, "but things are looking more on the positive side." That could mean that at long last Malaysia is climbing out of its rut.