By Michael Shari By all accounts, Malaysian Prime Minister Mahathir Mohamad has had a symbiotic relationship with Daim Zainuddin since the late 1980s. It was Daim who held together the business empire of Mahathir's ruling political party, United Malays National Organization (UMNO), commonly known as Malaysia Inc. Daim installed his personal proteges as CEOs of corporations that raised money for the party. And it was Mahathir who held UMNO itself together, saving it from breakup in 1988, jailing dissidents under the draconian Internal Security Act, and ensuring election victories with loyal employees every five years.
To hear diplomats and UMNO insiders tell it, Mahathir could not have done it without Daim, and Daim could not have done it without Mahathir. "Daim is Mahathir's alter ego," says an economist in Kuala Lumpur.
But now that Daim has resigned from the government and all but turned in his party-membership card -- relinquishing a string of powerful posts from Finance Minister to UMNO treasurer to UMNO Supreme Council member -- he retains absolutely no official power. So far, Mahathir hasn't replaced Daim. Indeed, he kept Daim's resignation a secret for six weeks until early June, when Mahathir announced that he was taking the reins of economic policy in his own hands (see BW Online, 6/5/01, "Malaysia's Ministerless Finance Ministry").
As a result, Mahathir faces the Herculean task of single-handedly holding together the entire structure that enjoins UMNO and Malaysia Inc. Meanwhile, the party is under siege -- both from the opposition Islamic Party of Malaysia and internal strife within UMNO -- and the economy is showing signs of a sharp downturn. The question is, can Mahathir pull it off?
BAILOUTS. If Mahathir does succeed in keeping the entire structure intact, he'll have to address an increasingly widespread belief that the Malaysian economy can no longer support it. UMNO cadres returning from party meetings in the countryside tell diplomats that they're overwhelmed with vehement complaints about several recent bailouts of UMNO-linked companies, from the national airline to an Internet service provider. Bank Negara Malaysia lost nearly $3 billion in foreign reserves during the first quarter of the year, and after two weeks of playing catch-up, reserves continued to drop in the second half of April, reviving months-old rumors of a possible devaluation.
In April, manufacturing sales -- a key driver of Malaysia's economy -- dropped 6% from March, and employment in the manufacturing sector dropped 1% during the same period. In mid-June, the Malaysian State of Johor defaulted on $15 million in debt to the national government, and economists fear other Malaysian states could follow. "Signs of a downturn are everywhere," says one of the economists in Kuala Lumpur. As a result, analysts have lowered their annual economic growth predictions from 5% to 4% or less this year.
Much depends on how Mahathir plays his cards at the elite levels of the ruling party in the next few weeks. He is expected to take his time filling the various posts that Daim left empty, which is expected to generate a feverish round of horse-trading at the annual UMNO General Assembly in late June. Signs are that the outcome may have been largely preordained. "Daim spent the last two months cleaning out his files," says another economist in Kuala Lumpur. "That suggests that some sort of planned succession may already be in place."
Next, Mahathir is expected to turn to the dozens of politically connected corporations that Daim has protected since he became Finance Minister in late 1998. Since then, they have been shielded from regional currency volatility by capital controls and a government-backed debt-restructuring program that has simply housed their debt. That was supposed to be supported by a now-defunct national plan sponsored by Daim to merge all 58 Malaysian financial institutions into several banks that would come under the control of Daim proteges.
Diplomats say Mahathir may simply wait for the CEOs of more than a dozen UMNO-linked corporations, such as CEO Halim Saad of construction-and-telecoms conglomerate Renong, to wear out their welcome before replacing them. "He'll let them twist and turn in the breeze," says a diplomat in Kuala Lumpur.
SETTING AN EXAMPLE. Mahathir may want Malaysia Inc. to at least appear to be reforming, and he's attempting to set an example for Daim's proteges. In April, Mahathir's son Mokhzani sold stakes in two companies after an abortive restructuring exercise and told the local press that he was getting out of business. In late May, Mahathir overturned a government plan to issue $1.6 billion in bonds to bail out a light-rail operator run by Renong. As if to drive the point home, Mokhzani resigned as treasurer of UMNO Youth, the party's youth wing, a week later.
It also looks as if the government isn't going out of its way to give Daim a graceful exit. On June 15, rumors swept Kuala Lumpur that he had been arrested, and his former colleages in the Cabinet and the party leadership didn't rush to deny them.
"What Daim does in the future, I don't know," Deputy Prime Minister Abdullah Badawi, who is now widely viewed as the second most powerful man in Malaysia after Daim's resignation, told reporters. "But for the time being, Daim is not a subject of police investigation." That message could hardly have been comforting to those who fear for the future in Daim's absence. Shari is BusinessWeek's Singapore bureau manager