Mahathir Halts Infrastructure Projects : Malaysia Threatens Economic 'Saboteurs'
International Herald Tribune
September 5, 1997
Michael Richardson 

Malaysia threatened Thursday to use its tough anti-subversion law to arrest those who "sabotage" its economy and announced that it had been forced to postpone key construction projects because of damage to its currency from financial market turmoil.

The moves came as fresh financial turbulence dragged most Southeast Asian currencies, led by the Malaysian ringgit, to new lows against the dollar.

Among the postponements, Prime Minister Mahathir bin Mohamad said, was the $6 billion Bakun hydroelectric project in Borneo, which he said would be delayed indefinitely. Its developer, Ekran Bhd., said earlier Thursday that it had dropped ABB Asea Brown Boveri and the other main contractors for the project following a dispute over contract terms. (Page 13)

Kuala Lumpur, Mr. Mahathir said, had "decided that recently announced projects such as the northern airport, the Linear City and several highways will be deferred owing to the weakness of the ringgit."

It was not immediately clear what effect this would have on the government's high-profile plans to establish a huge multimedia corridor in the country.

In an apparent shift of policy intended to try to restore battered investor confidence, Mr. Mahathir also said that a ban imposed last week on short-selling shares would be lifted because the problem was now "under control." Foreign fund managers had protested the restrictions.

The threat to use the anti-subversion law was a move that underlined sharp policy differences with other countries in the region also trying to halt turmoil on their stock and foreign exchange markets.

Despite the arrest warning and Mr. Mahathir's announcement Wednesday that the government would inject up to $20 billion into the market, Malaysian stocks fell for the 11th consecutive day Thursday, with the benchmark Composite Index finishing down 2.62 percent, at 731.12 points, its lowest level since 1993. The index had fallen as much as 10 percent in the day as foreign investors dumped shares, before recovering on local buying.

The ringgit fell sharply, raising the dollar to a record 3.0352 ringgit from 2.9353 on Thursday.

Analysts said investors had been unnerved by the government's threat to use the Internal Security Act against Malaysians found aiding foreign speculators selling off stocks and the ringgit. The act allows for virtually indefinite detention without trial.

"If they continue to break the rules and sabotage the economy," Deputy Prime Minister Anwar Ibrahim said when asked if Kuala Lumpur would use the law against local stock market speculators, "of course, we do not preclude that possibility."

"But, what I'm suggesting is that right now as it stands, I'm satisfied there's absolutely no necessity for us to resort to any such measures," he said, adding, "We are being supported by all quarters."

Mr. Anwar, who is also finance minister, said Kuala Lumpur was discussing a collective strategy to fight back against speculators with its partners in the Association of South East Asian Nations. ASEAN groups Brunei, Burma, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

Malaysia's stock market has plunged about 40 percent so far this year while the ringgit has fallen about 20 percent against the dollar since early July, when Thailand triggered a regionwide currency and stock market rout when it was forced to devalue the baht.

Since then, Thailand and Indonesia have introduced reform measures to cut their large current-account deficits and restore investor confidence.

Thailand agreed last month to a package of reforms, including cuts in government spending and tax increases, after negotiations with the International Monetary Fund. In return, it was given a $17.2 billion multinational loan

Indonesia announced Wednesday that it would cut its budget, delay major infrastructure projects, curb luxury imports and increase exports.

Jakarta followed up Thursday by cutting interest rates and abolishing a 49 percent limit on foreign ownership of new shares.

In reaction, the benchmark Jakarta stock index closed up 4.15 percent at 533.87 points — its highest level in a week — while the Indonesian rupiah was relatively stable, with the dollar falling to 3,029 rupiah from 3,037.50.

From record highs in July, the stock index has tumbled more than 30 percent. The rupiah has fallen by a similar amount against the dollar since the start of the year.

Singapore — although not affected to the same degree by currency volatility because of its strong economic fundamentals — has indicated that it will press ahead with financial deregulation and privatization to make its economy even more open and internationally competitive.

The Philippines is expected to reaffirm its commitment to open-market policies when President Fidel Ramos meets Friday with senior officials and business leaders on economic directions.

Analysts said that only Kuala Lumpur had sought to intervene in the stock market and avoid policies that would restore investor confidence.

"Malaysia is, in a sense, swimming against the current and looking outside its own boundaries for the source of the problem," Dennis de Tray, chief representative of the World Bank in Indonesia, told Reuters. "That's a mistake."

The reforms introduced by the government of President Suharto, he said, "indicated that Indonesia, in contrast, was prepared to look at ways of improving efficiency in its own economy as the principal means of restoring confidence."

Mr. Suharto had shown an understanding of "the need to do some hard things and not fall back on populism or nationalism as an excuse for closing" markets, Mr. de Tray said.

Many analysts are puzzled by Malaysia's recent propensity to blame foreigners for its economic problems because this will frighten investors away just when they are most urgently needed and make it more difficult for the country to fulfill its ambition to become a regional financial hub.

Although Mr. Mahathir has been a frequent critic of the West in the past, his economic policies have been far from xenophobic, welcoming foreign labor, joint ventures, investment and technology as an essential ingredient of the country's rapid growth and modernization.

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