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Malaysia's Mahathir eyes legacy, targets ghosts

By Simon Cameron-Moore

KUALA LUMPUR (Reuters) - After a four year gap, investors are suddenly listening to the Malaysia story again as Prime Minister Mahathir Mohamad struggles for a happy ending to his 20-year rule and sets about busting ghosts that it spawned.

Mahathir, who has taken personal charge of the Finance Ministry, has made restructuring debt-addled corporates a priority, with the giant United Engineers-Renong Group top of the list.

It is a tactic that could also help rebuild his political fortunes ahead of the next election in 2004.

"Legacy for him is very important," says Terence Gomez, political scientist at Universiti Malaya.

With poll ratings down, an economy running out of steam and burdened by unaddressed corporate debt issues, Mahathir, 75, sees his achievement of establishing Malaysia in the front rank of emerging economies at risk, and the 2004 election in doubt.

"Mahathir has one eye on history and the other on the Malay vote," adds Peter Searle, author of "The Riddle of Malaysian Capitalism" and a political scientist in Southeast Asian studies at the University of Newcastle in Australia.

Support for Mahathir among ordinary Malays fell after the humiliation and jailing of his deputy Anwar Ibrahim in 1998. Bail-outs sanctioned by former finance minister Daim Zainuddin for rich businessmen have made things worse.

Daim quit in June after taking two months leave, fuelling talk of rift in a relationship that goes back over 25 years.

Gomez says a contributory factor was a clash of interests between Daim and one of Mahathir's sons. Mokhzani Mahathir, who sold his businesses off in April, denies it.

BRING IN THE PROFESSIONALS

Whatever the reason, Mahathir has turned his attention to a coterie of tycoons closely associated with Daim.

"The issue was not about loyalty but about regaining control of these assets and putting them back under his ambit subsequent to the political fall out with Daim," Gomez says.

These tycoons are still wading through a sea of debt after failing to restructure properly after the Asian crisis. Some of their methods damaged Malaysia's image for corporate governance.

But, according to P.K. Basu, Credit Suisse First Boston's regional economist in Singapore, restructuring in Malaysia was difficult so long as Daim was there.

"He was responsible for the creation and the role of individuals and corporate entities that have dominated Corporate Malaysia. His departure has cleared the way for more rapid restructuring," says Basu.

Professionals, notably Azman Yahya, are being brought in to do the job. Azman won respect as managing director of Danaharta, the national asset management agency set up to clear up Malaysia's post-crisis bad loans.

Azman takes over the chairmanship of both Danaharta and the Corporate Debt Restructuring Committee (CDRC) in August.

His first big job is helping the government agency bidding to take over United Engineers, and thereby control of Renong, heralding the exit of tycoon Halim Saad.

Failure of the UEM-Renong group, which is carrying debts of over 20 billion ringgit ($5.3 billion), would have a severe impact on the banking system and financial markets.

INTEREST AROUSED

The UEM deal isn't through yet, but Mahathir means business.

At Malaysian Airline System, which the government took control of at the turn of the year, a thorough audit is underway to see how the previous management, under the chairmanship of Tajudin Ramli, ran the loss-making flag carrier which is flying with $2 billion of debt.

Mahathir says any wrongdoing will be punished. "If criminal, we will take legal action," he said a few days ago after revealing the books were being checked. "If it's only because it is due to lack of prudence, inefficiency, we will see," he added.

Another company, Land and General Bhd (L&G), chaired by Azmi Wan Hamzah, on Thursday announced for the second straight year it was defaulting on a $100 million eurobond.

Malaysian Resources Corp Bhd (MRCB), with debts of one billion ringgit, and headed by businessman Abdul Rahman Maidin, is another going through the restructuring wringer.

With a television channel and a newspaper group among assets likely to be sold, the government, which wants to keep its media friendly, will carefully scrutinise potential buyers.

The restructuring, attention to corporate governance issues and a resurgence of mergers and acquisition activity after a four-year hiatus has got investors talking about Malaysia again.

"Last time, only 10 percent wanted to hear the Malaysia story. This time 100 percent wanted to hear," CSFB's Basu says comparing a roadshow to the United States with one seven months ago.

Given investors' current wariness about emerging markets and southeast Asia, it could mean Mahathir's doing something right.

But political scientists see a risk that old habits die hard, and assets may again be parcelled out to other favoured businessmen after the current round of restructuring.

"It was Mahathir who since the mid-1980s made that fusion between business and politics, with its implications for patronage," notes Searle.