Asia Times
20th April 2001

DIRE STRAITS

Is Malaysia ready for life after Daim?

By Anil Netto

The decision by Malaysia's powerful Finance Minister Daim Zainuddin to go on two-months' leave has rekindled speculation about his long-term position in government, despite Prime Minister Mahathir Mohamad's denial that the minister is resigning.

The vacation announcement on Thursday came after months of speculation of a rift between Daim and Mahathir. There have been rumors of a falling out between the two over such issues as banking consolidation and the country's ringgit currency peg. The move also highlights the state of the economy and what critics say is the lack of meaningful economic and political reforms to improve accountability and transparency.

Daim's vacation, officially because of fatigue, comes at a time when the economic growth forecast for 2001 has been whittled down steadily from 7 percent to 5-6 percent to just over 4 percent in the past few months. The government had also come under fire over controversial bail-outs and the use of state pension funds to take up unsubscribed shares in the initial public offer of a politically linked firm.

"He could be tired, you people [media] disturb him a lot, asking questions endlessly and criticizing him over the Malaysia Airlines issue," Mahathir told journalists. He was referring to the government's buy-back of Malaysia Airlines (MAS) shares earlier this year from Naluri Bhd, an aviation group led by Tajudin Ramli, who was MAS chairman. The government bought a 29 percent stake at 8 ringgit per share, more than double the market price.

Fears that the ringgit would be re-pegged have also dogged the stock market as foreign investors reportedly continued to liquidate their positions on major counters. The government has denied rumors of a re-peg.

Mahathir said on Thursday he would not appoint an acting finance minister and Entrepreneur Development Minister Nazri Aziz will represent Daim in cabinet meetings. However, should Daim not return, Domestic Trade Minister Muhyiddin Yassin and ex-finance minister Razaleigh Hamzah are his most likely successors.

Politically, the administration of Mahathir, in power for 20 years, has been stung with criticism after the arrests of eight opposition activists under the draconian Internal Security Act, which allows indefinite detention without trial. The activists are linked to the National Justice Party (Keadilan), led by Wan Azizah Wan Ismail, wife of jailed former deputy premier Anwar Ibrahim.

Anwar, now in hospital with a back ailment, is embroiled in a psychological tussle with the government over whether he has a right to travel abroad for minimally invasive endoscopic spinal surgery at a specialist clinic in Munich. The government insists that the surgery be performed in Kuala Lumpur and that any specialist and equipment required should be flown in.

Daim succeeded Anwar as Finance Minister in January 1999 after Anwar was ousted from the cabinet in September the previous year, and there is believed to be little love lost between the two.

The announcement of Daim's vacation comes soon after the central bank announced that its net international reserves fell by US$1.5 billion (5.7 billion ringgit) in the second half of last month to reach $27.2 billion on March 31. The central bank said that the decline was mainly due to an unrealized revaluation loss due to the appreciation of the US dollar and the diversified currency composition of the bank's international reserves. The National Economic Action Council (NEAC), of which Daim has been executive director since December 1997, carried a table on its website showing that Malaysia's external reserves to GDP ratio of 43 percent in June 2000 was higher than that of most industrialized East Asian economies, apart from Singapore.

Earlier this month, Standard & Poor's revised the outlook of its long-term foreign currency rating on Malaysia to stable from positive. Apart from an unusually high fiscal deficit of 5.7 percent of GDP, it also estimated that nonperforming loans (NPLs) would reach 30 percent within a year and that the recapitalization costs for the banking sector would reach 40 percent of GDP.

The NEAC refuted the claim, arguing that "even at its peak, net NPLs only reached 14.9 percent in November 1998 and in gross terms, NPLs only reached 20 percent of outstanding loans".

Although Mahathir has denied that Daim is resigning, it has not stopped tongues wagging. "He is not leaving in the first place. Just going on leave," Mahathir said. For some time talk of a rift between the two has persisted, but both men have said that they are able to work with each other.

Expectations of the departure of Daim heightened last year when Mahathir appointed former central banker Nor Mohamed Yakcop as his economic adviser. And earlier this week, the premier appointed another economic adviser, former central bank chief Ali Abul Hassan Sulaiman.

Daim, 62, was born in a village in Kedah, Mahathir's home state. This is his second stint as finance minister, the first being from 1984-1991, after which he returned to the private sector. He was brought back into the cabinet in June 1998 as special functions minister to promote economic recovery, a move seen as a precursor to Anwar's ouster three months later.

But meaningful reforms to promote transparency and accountability have been slow in coming. Despite Mahathir's frequent lashing out at the global financial architecture, Malaysia remains dependent on the performance of the US and Japanese economy, especially in the electronics sector. The US absorbs a fifth of Malaysia's exports.

Economists have noted that structural flaws in the economy cannot be corrected by macro-economic policies and that countries such as Malaysia can ill afford another round of pump-priming. The government recently announced a 3 billion ringgit stimulus package to boost consumer spending and speed up infrastructure projects.

Critics point out that instead of merely restructuring and rehabilitating bad loans, the top management of heavily indebted firms should have been sacked. Without such a deterrent, the performance of these firms is unlikely to improve.

They also want the link between politics and business to be severed so that the system of dispensing patronage and contracts to favored firms is eliminated. Instead, there appears to be a further attempt at wealth concentration, as seen in the initial bank mergers scheme that envisaged six super banks. The scheme was later widened to create 10 large banks, but only after much criticism.

Several analysts want the regulatory authorities to be truly independent and impartial to wipe out any unethical wheeling and dealing and the alleged propping up of the stock market. They also want the interests of minority shareholders - especially in politically connected firms - to be protected. In the past, the rights of minority shareholders have seldom been an issue of concern during corporate restructuring.

At present, power is highly centralized in the Malaysian political system and there is a widespread perception that regulatory institutions, such as Bank Negara (the Central Bank) and the Securities Commission, do not have sufficient autonomy to act independently.

With Daim's vacation confirmed, the real issue now is whether Malaysia has the political will to implement serious structural reforms and changes. More crucially, the key question is whether such reforms can be implemented and enforced impartially without fear or favor, especially when they involve politically connected firms and individuals.

But as long as political reforms - such as the decentralization of power in the prime minister's office and the strengthening of democratic institutions - are lacking, there appears little hope of achieving meaningful economic and corporate reforms.

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