Are Malaysia's Bootstraps Strong Enough?

Kuala Lumpur makes a bid for homegrown restructuring

One of Malaysia's best-connected businessmen, Tajudin Ramli, ushers a half-dozen foreigners across a stage under a stream of flickering red lasers at a lavish charity dinner in Kuala Lumpur. The men are Ramli's partners in the cellular phone business, Malaysia-based executives from Ericsson, Siemens, Digital Equipment, and Lucent Technologies. Each lugs a meter-long cardboard check for up to $28,000--a donation for "less-fortunate Malaysians" battered by the 40% depreciation of the Malaysian ringgit. Standing at Ramli's side, Finance Minister Anwar Ibrahim uses the occasion to spread a little cheer about the economy: "I'm very optimistic that we have the means to overcome the temporary problems we are facing."

The Nov. 27 ceremony is a metaphor for Malaysia's approach to the Asian crisis: Let's all chip in and see how far self-help can get us. Malaysia certainly needs help. Many of its companies are overextended, and some analysts estimate that banks could find 24% of their loans turning bad by next year. The stock market has dropped nearly 60% since its February high, and the ringgit is down 40%. No wonder there are concerns that the International Monetary Fund may have to step in. IMF Managing Director Michel Camdessus told Malaysian business leaders on Dec. 1 that he would not rule out a Malaysian bailout if the country's financial situation deteriorates further.

But the IMF, when it steps in, inflicts lots of pain with demands to shut ailing banks, tighten the terms of new bank loans, and cut the budget deficit. A bailout would also mean a loss of face for Prime Minister Mahathir Mohamad, who has accused foreign bankers of plotting to sabotage Malaysia's economy.

So to stave off the Asian flu, Malaysia's government is teaming up with the corporate sector in its own homegrown restructuring (table). It's a plan that has been tried before in Asia--to marshal the financial strength within the country to shore up the weaker players, and to cut spending by stemming the flow of imports. "All the while they say Malaysia is in denial, but now we have taken action," says Daim Zainuddin, economic adviser to the Prime Minister. "The government has to tighten its belt, bite the bullet, and cut spending as much as possible. We have to send out the right signal."

TRADING CURBS. The measures include big bailout plans for ailing companies, the postponement of public works projects worth billions of dollars, lowering the current-account deficit from 8% of gross national product to 4%, and slapping trading curbs on five shaky Malaysian brokerages with more curbs to come. The government has also warned retailers not to raise prices, and pledged to reverse a policy to expel lower-cost foreign laborers. Next, some bankers expect Malaysia to tighten its money policy, jacking up interest rates as Indonesia and Thailand have done to curb capital flight. Daim also says he will try to consolidate Malaysia's 37 banks, forcing the weak to merge with the strong--a move that would hit some party stalwarts' family-run operations.

The Malaysians do have an advantage over their harder-hit neighbors. Unlike Indonesia and Thailand, where businesses expanded blindly using cheap offshore debt, only 2.5% of Malaysia's funding has come from offshore lenders, according to Soc-Gen Crosby Research (Malaysia). So even with a depreciated currency, Malaysia won't face the same kind of cash crunch when having to pay off U.S. dollar loans. In addition, savings rates in Malaysia are 40%, among the highest in the world. And exports are growing--up 20% so far this year in ringgit terms.

Investors are still assessing the homegrown plan, waiting to see how it will actually change things in Malaysia. Take the example of Renong, a vast conglomerate of construction, real estate, and telephone companies, which lost 20% of its market value in four days. Renong, run by people closely connected to the ruling United Malays National Organization (UMNO) party, ran short on cash. So, in a style reminiscent of Japan's corporate bailouts, Renong was acquired by one of its more cash-flush subsidiaries, United Engineers Malaysia (UEM), at an estimated cost of $671 million. "We can see it's a bailout, but we don't know who's bailing out whom," complains a Malaysian broker.

ARM-TWISTING. Investors reacted by dumping Renong stock. Regulators slapped UEM on the wrist with a nominal fine for failing to report the takeover. Halim Saad, chairman of Renong, declined a request for an interview.

That episode dented confidence in many perfectly healthy companies. The stock price of Malakoff--a cash-rich company with a power plant that gets most of its revenue from selling electricity to the government--fell 50% because of rumors that it was being pressured to buy its parent, Malaysian Resources Corp., a conglomerate linked to Finance Minister Anwar. "The rumor is that all companies with strong cash flow will be arm-twisted into taking over insolvent companies. You can't be sure if it's just a rumor, because a precedent has been set," says a Malaysian banker.

Another bailout is under way at Ekran, a politically connected company that won a contract to build the $4.3 billion Bakun hydroelectric dam project. Now, Malaysian bankers say the company, with annual revenue of $150 million, will get compensated for millions of dollars it spent preparing for the project despite a public assurance by Anwar that "this is no bailout." More companies are said to be in line with their hands out. "You can be certain something else will have to happen," says the banker.

If the IMF bailouts of Thailand, Indonesia, and South Korea succeed, Asian markets may calm down enough to let Malaysia's program work. But even Mahathir admitted after his talks with Camdessus that if his effort runs into trouble, the IMF would be "the perfect authority for enforcing rules and regulations" needed in Malaysia. Yet Mahathir may just beat the odds and keep his style of economic management intact.

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