When Mahathir Mohamad stepped down as Malaysia's Prime Minister last October after 22 years and handed over the reins to Abdullah Ahmad Badawi, few expected much to change. Badawi, an avuncular Islamic scholar and former Foreign Minister, wasn't expected to make waves -- not immediately, at least.
But Mr. Nice Guy, as Badawi is affectionately known, has already shown that he is very much his own man. By Mar. 12, when he called for a snap national election, he had already cracked down on corruption, unraveled deals between the government and connected businesspeople, and demanded greater transparency. "The speed and the execution have shocked me," says Nazir Razak, CEO of CIMB Group investment bank and brother of Deputy Prime Minister Najib Razak. Now foreign investors are taking notice, snapping up assets while prices are low.
The question is how far Badawi, 64, will go, and how long his reforms will last beyond voting day on Mar. 21, when the ruling United Malays National Organization (UMNO) is expected to win comfortably. The consensus among political analysts, diplomats, and businesspeople is that "crony capitalism" is so deeply ingrained that it will take a mighty effort to overhaul the system. "The seeking of lucrative government contracts and monopolies has been part of the culture for two decades," says Singapore-based Morgan Stanley economist Daniel Lian, who estimates the cost of corruption at $100 billion during that period.
Yet the evidence is that Badawi is a serious reformer. Consider his initiatives so far. Within weeks of taking over, he nixed a controversial $3.8 billion national railroad contract to a consortium controlled by Syed Mokhtar Al-Bukhary, a businessman close to Mahathir. Then he charged steel tycoon Eric Chia with criminal breach of trust and Land & Cooperative Development Minister Kasitah Gaddam with corruption. They both pleaded innocent, but the anticorruption message will be lost on no one when they stand trial. "He has been very courageous so far," says Noordin Sopiee, chairman of the Center for Strategic & International Studies in Kuala Lumpur. "He looks like he's made of bamboo, but he's made of steel."
Some of Badawi's more investor-friendly moves would never have been tolerated under the previous government. For starters, he's insisting that all contracts be awarded by open tender, which makes it easier for companies that are not linked to senior government officials to win contracts. Signaling a dramatic improvement in sometimes rancorous relations with neighboring Singapore, Badawi gave the green light in early March to the sale of a 5% government-held stake in Telekom Malaysia to Temasek Holdings Ltd., the Singapore government's investment arm. "All this makes people stand up and take notice and say, 'This guy is for real,"' says Uday Jayaram, head of Malaysian research at ING Financial Markets (ING ) in Kuala Lumpur.
As a result, foreign investors who bailed out during the financial crisis of 1997-98 are taking a fresh look. Net foreign inflows nearly doubled, to $1.8 billion, in the fourth quarter of 2003 from the third quarter, and stockbrokers say the flow has increased dramatically since the beginning of the year. Foreign fund managers followed Temasek into Telekom Malaysia, and upped their investment in national carmaker Proton after Mitsubishi Motors Corp. sold its 8% stake in early March. "It has been manic in the past few weeks," says Stephen Hagger, head of Malaysian research at Credit Suisse First Boston (CSR ) in Kuala Lumpur. "Everybody wants a piece of Malaysia."
To some extent, Badawi is capitalizing on the fact that Malaysia has been largely overlooked by investors who got burned in 1998, when Bank Negara Malaysia, the central bank, slapped on capital controls, devalued the ringgit, and pegged it to the U.S. dollar. A lot has changed since then. Conglomerates such as Malaysian Resources Corp. and Renong, and government-linked corporations such as Malaysia Airlines, have restructured, cleaned up balance sheets, and installed professional managers.
One important factor in Badawi's favor is the perception that his Islamic credentials will help stabilize Malaysian politics. The son and grandson of revered Islamic scholars, Badawi is driven by a passion to promote progressive, modern strains of Islam. That's a welcome alternative to the opposition Islamic Party of Malaysia, which preaches fundamentalism and has introduced shariah criminal law in one Malysian state. That's translating into support for Badawi from ethnic Malay Muslims, who account for just over half the population. It's also a comfort to foreign investors who have been driven out of neighboring Indonesia by anti-Western violence.
Yet Badawi still has a lot to prove, not just at home but as far away as Washington. His critics say his campaign promises to crack down on corruption and promote modernist Islam are all too familiar. "People saw Mahathir make similar promises," says Steven Gan, editor of Malaysiakini.com, an independent news Web site. "And then after his victory, it was back to business as usual." Not so, says the Prime Minister's office. "He will not tolerate corruption," says one of Badawi's aides. "I don't see there being a letup in the battle against corruption."
In Washington, the hot-button issue is Malaysia's possible involvement in nuclear proliferation. In February, President George W. Bush called for an investigation into the role of Badawi's son, Kamaluddin Abdullah Badawi, in the manufacturing of parts for uranium-enriching centrifuges that were seized aboard a ship bound for Libya last October. Officials of Kamaluddin's Scomi Precision Engineering, which made the gear, deny all knowledge of its intended use, and Malaysian police promptly cleared Kamalludin. Badawi's opponents are making this an issue. "They can't pin anything on the Prime Minister, so they go after his son," complains an aide to Badawi. Despite the incident, Badawi and his reforms are being taken seriously. "The genie is out of the bottle, and he doesn't want to put it back," says Francis Yeoh, managing director of property developer and utility YTL Corp. If so, that's good news for Malaysians -- and Malaysia Inc.
By Frederik Balfour in Kuala Lumpur