Online Original: Malaysia: `The Worst Is Yet To Come'

These are painful times for Malaysia Inc. Interest rates are hovering at a steep 16%, while loan growth is being cut in half this year. "Companies are going bust one after another," says Daim Zainuddin, Prime Minister Mahathir Mohamad's top economic adviser. But rather than embrace an IMF-style austerity program and see massive bankruptcies and layoffs, Malaysia is doing it "our way," Daim says.

But the country's homegrown solution to the currency crisis is a risky proposition. The hope is that a tight money policy will force major companies to revamp management and become more efficient. But the government does not want key banks and giant corporations to go belly up for fear of triggering social and political instability.

Mahathir, whose own angry counterattacks on currency speculators contributed to a stock market crash, is speaking out once again. In an interview with Business Week, the Prime Minister insists there will be no bailouts, but at the same time he lauds the U.S. government rescue of Chrysler in the 1970s as an excellent example of how a helping hand turned around an ailing giant. "After [Chrysler] recovered, it paid back the money and it even paid taxes," he says.

'BLOOD ON THE STREETS.' For Malaysia's leaders, the alternative -- an IMF-style austerity program -- looks none too attractive. Mahathir's goal is to avoid what he calls "blood on the streets" rather than encourage it. As he sees it, bank closures, massive layoffs, and public protests in countries with an IMF program such as Thailand, Korea, and Indonesia have not yet restored confidence in those economies. "When people are thrown out of work, the currency is devalued, people are paid less, and you remove subsidies, you are going to kill people, literally kill people," he says.

The trouble is, Malaysia's own remedy isn't inspiring investor confidence, either. Some critics claim it is prolonging the country's pain and encouraging bailouts of poorly run corporate giants. After rumors leaked that Malaysian Airline System (MAS) was preparing a complex restructuring that would also cover CEO Tajudin Ramli's personal debts, the market dropped by nearly 3%. It renewed concerns that the country was sanctioning rescue attempts for politically linked conglomerates at the expense of minority shareholders. "This is precisely the kind of thing foreign investors don't want to see," says one securities analyst.

Further compounding Malaysia's problems is the appearance of disunity in Mahathir's government. While the Prime Minister seems to be resisting painful domestic reforms, his Finance Minister Anwar Ibrahim is calling for greater transparency and an end to crony capitalism. Mahathir insists that they are singing the same tune, and he blames the press for accentuating differences. Whatever the case, foreign investors are not quite sure what to believe, further impeding a return of confidence. "This only adds to the confusion," says one Malaysian analyst.

HITTING BOTTOM? Unless perceptions change dramatically, the picture isn't likely to improve. Mohamed Ariff, executive director of the Malaysian Institute of Economic Research, says the economy is going to hit bottom in the last quarter of this year, when the country is likely to experience negative growth. "The worst is yet to come," he warns. "I think the real sector has yet to feel the pinch."

The contours of the Malaysia program may become clearer once the National Economic Action Council, a group Mahathir created late last year, comes up with recommendations to hasten a recovery. Already, it has submitted 18 of 30 position papers to the government on issues such as how to reduce interest rates while keeping the currency stable. But detractors say the group may wind up being a lobby for vested interests. If that happens, the recovery could be slow indeed. In the end, Malaysia Inc. may just be prolonging its day of reckoning.

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