But Critics Fear a Range of Future Troubles : Kuala Lumpur Insists Controls Are Effective 
International Herald Tribune
October 10, 1998
Michael Richardson 

Sheltered by exchange controls from the wild gyrations in currency values that have roiled global markets this week, Malaysia is claiming to have laid the basis for a rapid rebound from its recession.

But bankers and other potential foreign investors said Friday that by effectively forcing troubled Malaysian banks to increase their lending to heavily-indebted companies, many with close ties to the government, Malaysian authorities may be creating a more serious banking crisis.

Adding to those fears, the Malaysian conglomerate Renong Bhd. announced Friday that it would restructure nearly $3 billion in debt with government-backed bonds, which analysts said amounted to a government bailout. Renong was the main investment vehicle of Malaysia's main political party, the United Malays National Organization, headed by Prime Minister Mahathir bin Mohamad, until it was sold off several years ago.

Executives of the company said in Kuala Lumpur that the plan, drawn up by Credit Suisse First Boston, had been approved in principle by the government and would benefit Renong, its associate United Engineers (Malaysia) Bhd., and projects controlled by them.

"This move is in line with the government's concerted efforts to safeguard its interest, and that of the public, that these projects do not fail," said Halim Saad, the Renong group's executive chairman.

The conglomerate has interests in construction and engineering, financial services, telecommunications, toll-road management, hotels and oil.

Mr. Halim is a protégé of Mr. Mahathir's longtime adviser, Daim Zainuddin, who is now the minister charged with reviving the economy.

In Malaysia, many of the largest conglomerates have close links to the political parties in the governing coalition. Much of the collateral for bank loans to these and other companies is in the form of property and shares.

"Malaysia is clearly going back to the bad old days of government-directed lending and inflation of financial assets, particularly in property and shares, to try to kick start economic growth," said Simon Flint, an economist at Independent Economic Analysis Ltd. "I can't say it won't work, but I'm certainly concerned that the value of assets held by banks will be impaired because loans won't be determined by the banks' judgment of potential risks."

Raymond Lim, a group chief economist at ABN-AMRO Asia Securities Ltd., said that, in essence, the Malaysian government wanted to impose its judgment on where and how much to lend, and "quite likely" on which company in trouble ought to be bailed out.

"The government is taking on the banks' credit risk functions and, implicitly, guaranteeing these loans," he said. "This is bad for the banking system as a whole, because it may well erode domestic confidence."

But Mr. Daim saw things differently. "There are signs that confidence has returned," he said. "Banks have started to lend, the private sector is now borrowing, and economic activity is picking up."

He said that the worst of the contraction in the economy was past and predicted that the country would return to growth next year.

Under the exchange controls, which were announced by the government on Sept. 1 to shield the economy from foreign pressure, the currency, the ringgit, was fixed at 3.80 to the dollar and became nonconvertible abroad as of Oct. 1.

Those measures were coupled with steps by Bank Negara, the central bank, to loosen monetary policy.

Bank Negara recently redefined rules on nonperforming loans so that banks do not have to declare them as such or set aside funds to cover potential liabilities until no interest has been paid for six months, instead of the previous three months. Three months is the norm under international accounting standards.

As a result of the reclassification of nonperforming loans, they have fallen from 67 billion ringgit ($17.68 billion), or 15.9 percent of all loans, to 41 billion ringgit, or 9.7 percent of outstanding credits, according to official figures.

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