This time last year, Stephen Hagger was lucky if fund managers took his calls. They just weren't interested in what the chief of research at Credit Suisse First Boston in Kuala Lumpur had to say about Malaysia's prospects. First of all, a bad aroma still lingered from the 1998 imposition of capital controls. Malaysia was also still seen as Land of the Cronies--favored businessmen who were dragging down some of the country's top companies. Finally, many Western companies were shifting production to China. Malaysia, in Hagger's words, "was a tough story to sell to investors."
Now, all of a sudden, Hagger's phone is ringing nonstop. "There are so many people who swore they'd never invest in Malaysia again," he says. "Now they're clamoring to get back in." So far this year, foreign investors have plowed $2 billion-plus into the Kuala Lumpur Stock Exchange, helping push it up 40% in the past 12 months. The broader economy is coming back, too. With the U.S. recovering faster than expected, exports are expected to grow 11.6% this year. Low interest rates and strong consumer demand are boosting domestic consumption. As a result, economists expect Malaysia's gross domestic product to expand at a 6% clip in 2002.
To be sure, the U.S. rebound is tentative, and in the aftermath of September 11, some American companies remain wary about doing business in a Muslim nation--even a moderate one. But a new pragmatism is blowing through the corridors of power in Kuala Lumpur. Malaysia's high-tech aspirations have partly given way to a humble reorientation toward services and logistics. The government is reining in the worst excesses of the cronies. And Prime Minister Mahathir Mohamad, long an outspoken critic of the West, has managed to repair relations with the U.S., Malaysia's No. 1 trading partner, thanks to a crackdown on Islamic militants that has earned him an invitation to Washington in early May.
To witness high-tech Malaysia's collision with reality, one need go no further than the Multimedia Supercorridor. The MMSC, a sprawl of science parks and high-tech incubators near Kuala Lumpur, was to be Malaysia's answer to Silicon Valley. Today, that is a dream deferred. No longer are the Corridor's chiefs focused on wooing American software houses or chip-design companies. They'll settle for far less glamorous businesses. Two recent new tenants: call centers operated by Japan phone giant Nippon Telegraph & Telephone Corp. and the courier company DHL Worldwide Express.
In another gesture to make peace with its future, Malaysia has moved into the port business. Since opening two years ago, the Port of Tanjung Pelepas in the southern city of Johor Bahru has attracted a pair of big fish: Danish shipping line Maersk and Taiwan's Evergreen Marine Corp. In the case of both companies, the deciding factor was costs that are 30% lower than in Singapore. "In this harsh economic climate," says Evergreen spokesperson Elysia Chen, "any cost saving is considered."
While investors and analysts applaud such diversification, they save most of their kudos for the cleanup of the corporate sector. Much of the credit is given to Azman Yahya, the 37-year-old head of both the state asset management company, Pengurusan Danaharta Nasional, and the Corporate Debt Restructuring Committee (CDRC). As of Dec. 31, the two agencies said they had recovered, restructured (at a steep discount), or disposed of nearly $13.5 billion of bad loans. That said, no foreign analysts have been allowed to closely monitor Danaharta's success.
It's the sackings that have really made people sit up and take notice. Halim Saad, chief of the loss-riddled engineering and construction conglomerate Renong Group, lost his post last October, while Mahathir favorite Tajudin Ramli, chief of Malaysian Airlines System, was fired in early 2001. Halim piled up more than $6.5 billion in debt and expanded into such money-losing endeavors as road building, light rail transit, and telecoms. The government took MAS private and replaced Tajudin with Mohamad Noor Yusoff, a respected ex-banker. Tajudin is being probed for financial irregularities. Dominic Armstrong, head of Malaysia research at ABN Amro Asia Securities, likens the men's ouster to the "removal of a nasty cancer."
No one is quite ready to declare crony capitalism dead. Cynics say Mahathir is merely replacing aging cronies with younger ones. Some say tycoon Syed Mokhtar Al-Bukhary has been anointed the new CEO of Malaysia Inc. In the past 12 months, Syed-linked companies have acquired government stakes in Malaysia Mining Corp. (MMC) and hotel group Pernas International Holdings. Syed also owns 70% of Tanjung Pelepas port, most of which he hopes to sell to MMC. "The Prime Minister has a weakness: He gives to people who can deliver," says a businessman close to Mahathir. "Problem is, he ends up giving them too much."
Fortunately for Malaysia, political patronage has little bearing on the manufacturing export sector. After taking a big hit during the downturn, electronic component producers sense a rebound. Malaysian chipmaker Unisem Berhad says it was running at 50% capacity during the first quarter, compared with 30% last year, and became profitable again in March. "We've seen across-the-board improvement," says Unisem Managing Director John Chia. "The months ahead look promising." Disk-drive maker Iomega (Malaysia) and silicon-wafer-fab plant Silterra Malaysia also report stronger sales.
When exports pick up, Malaysians find work. Online employment agency JobStreet.com CEO Mark Chang says new job listings are up 50% from six months ago, many of them from small and medium-size manufacturers supplying multinationals. Better job prospects are buoying consumer confidence. Auto sales during the first two months of last year increased 20.8% year-on-year, to 69,068 vehicles. At a Honda Motor Co. dealership in Penang, salesmen are working through a six-month waiting list for the latest Honda sport-utility vehicle. Home developers report strong sales in new houses, thanks in part to such incentives as 0% financing during the first year for prebuilt purchases.
Malaysia, it seems, is back. "We've seen an aggressive corporate governance drive, there's the feeling that [Mahathir] has strengthened his position, an economy that is cyclically primed, and a lot of the debt problems ring-fenced," says Stephen Weller, head of research for Salomon Smith Barney in Kuala Lumpur. "I can't think of one red light." Well, there is one. When Mahathir is in Washington, he'll have to convince his hosts that his nation is safe for U.S. business investment. That won't be easy. But Mahathir doesn't quit: His police keep arresting suspected extremists--and will continue to do so as long as he's around.
By Frederik Balfour in Kuala Lumpur
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