Can Mahathir Go His Own Way?

So far, he is avoiding reforms--and the economy shows it

The glittering twin towers of the Kuala Lumpur City Centre are the world's tallest buildings--and monuments to Malaysian Prime Minister Mahathir Mohamad's obsession with making his country rich and powerful. Yet the capital is buzzing with a rumor: Occupancy rates for the towers are so low that the super-rich Sultan of Brunei is buying one to bail out developers.

State oil company Petroliam Nasional, the towers' owner, denies such talk and says it has plenty of cash. Could well be. The point is that in the days of breakneck expansion, such a rumor would never have started. These are uncertain times. Mahathir swears he has a homegrown solution to pull Malaysia Inc. out of the morass of bad debts, foreign exchange losses, and slumping sales created by the crisis. But instead of inspiring confidence, the Mahathir plan is provoking murmurs of doubt. Bailing out all the banks and big companies may be a way to avoid shutting down weak institutions and shaking up industry. Some skeptics even fear that big bailouts may drive up inflation. If so, Malaysia's workout may resemble Indonesia's more than Thailand's or South Korea's. Those countries are opting for painful reforms in hopes of a quick turnaround.

DEBT DEFAULTS. This is a risky moment for the Malaysian economy. Mahathir has clearly decided to spend heavily to shore up key companies. The government has just concluded a $500 million bailout of Sime Bank and Bank Bumiputra Malaysia, two of the nation's largest financial institutions. Rather than adopt the kinds of stringent reforms mandated by the International Monetary Fund, Mahathir and his advisers are going it alone. Because Malaysia has relatively little foreign debt, it has so far avoided an external bailout.

But internally, defaults on ringgit-denominated debt are surging. The government is reluctant to force interest rates any higher, lest more companies default. But economists say only higher rates can check inflation and the currency's depreciation. "The pain is there," says Abdul Rashid Hussein, executive chairman of Rashid Hussein Bank, which is buying Sime Bank.

The pain is shooting through almost every corporate boardroom in Malaysia. Cellular giant Technology Resources Industries has reported a $200 million foreign exchange loss for 1997. Politically prominent conglomerate Malaysian Resources Corp. has delayed its annual meeting as it scrambles to refinance a $250 million bridge loan, even after it benefited from a generous purchase of its cellular unit by Telekom Malaysia.

Mahathir thinks IMF-style reforms would just make things worse. Indonesia "took the IMF medicine, and the patient died," says Rashid Hussein. By channeling local bank funds to ailing companies, he says, "we can manage it better." Adds Francis Yeoh, managing director of YTL Corp., a specialist in power and infrastructure projects: "The IMF has too frosty a grip. We need a warmer embrace."

The Mahathir strategy typically favors a chosen few, even though the government claims such deals are legitimate transactions. Rashid Hussein Bank's $225 million takeover of Sime Bank rescued shareholders in KUB Malaysia, which is controlled by prominent members of the ruling United Malays National Organization. Mirzan Mahathir, the Prime Minister's son, is selling his indebted shipping empire to Petronas.

Yet a small but increasingly strident number of people in government and the business community wish Mahathir would institute reforms. The reformers apparently have the ear of Deputy Prime Minister and Finance Minister Anwar Ibrahim, who has complained to visitors about the lack of reform. "Mahathir should have let his son fail," says a UMNO activist. "That would have confounded everyone and distinguished us from Indonesia. We were getting the message out that we were on track, but now what do we tell people?"


ILLEGAL IMMIGRANTS. On top of its own problems, Malaysia has to worry about the impact of Indonesia's. Thousands of illegal immigrants have come ashore in boats from the nearby Indonesian island of Sumatra. With more than 2 million immigrants already in Malaysia--most of them Indonesians--the country can ill afford more.

Malaysia's basic strengths will keep it stable. Its oil and gas production provides handsome hard-currency earnings. Prices of palm oil and rubber, two major exports, are high. Its electronics industry, though dominated by multinationals, continues to boom.

But even with these fundamental advantages, the evidence of corporate distress increases daily. It's understandable that Mahathir wants to help out his business friends. But the physician-turned-politician should remember that the alternative to stiff medicine can be a patient who doesn't get better.

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