Malaysia Eases Foreign Investment
International Herald Tribune
October 28, 2000
Thomas Fuller 

Eager to reverse the tide of foreign funds leaving the country, Malaysia on Friday abolished a key restriction on foreign investment imposed during the height of the region's economic crisis two years ago.

Analysts said the reversal reflected the urgent need for foreign capital in Malaysia and around Southeast Asia, where foreign money in stock markets has all but dried up, contributing to a plunge in share prices across the region.

When Malaysia's restrictions on foreign money were announced in September 1998, Prime Minister Mahathir bin Mohamad said the country could "no longer stay with the so-called free-market system." But the policy drove many foreign investors away, including some multinational companies worried about his anti-foreign rhetoric.

"We must acknowledge that in a borderless world, large international conglomerates have greater choices in their investment decisions," Finance Minister Daim Zainuddin said Friday.

Under the new rules, foreign investors in the stock market will no longer have to pay a special 10 percent capital-gains tax if they keep their money in the country for more than one year. While that rate is significantly lower than capital-gains rates in the West, foreign fund managers had complained that the tax was unfair because it did not affect local investors.

"We're back on a level playing field for most institutional investors," said Dominic Armstrong, head of research for Singapore and Malaysia at ABN-AMRO Securities. "Malaysia recognizes that they cannot go on abusing foreign investors."

Malaysia had already dismantled most of the capital controls adopted at the height of the crisis. Battered stock markets around the region are desperate to get back onto foreign investors' maps, with four bourses in the region down more than 40 percent this year.

Current forecasts suggest that foreign money may not come back too soon. A recent study by the Asian Development Bank estimated that next year, the five countries worst affected by the 1997 economic crisis — Indonesia, South Korea, Malaysia, the Philippines, and Thailand — would receive less than a quarter of the foreign stock-market investment they received this year. The five countries are projected to finish the year with a net inflow of $13.2 billion in portfolio money, according to the study, based on data compiled by the International Monetary Fund. Next year, the Fund estimates, the five countries will receive a paltry $3.3 billion

In the volatile world of stock-market investors, these are no better than educated guesses. But even numbers that are easier to predict — direct investments in factories or equipment — are well below pre-crisis levels.

Net foreign direct investment inflows to the five countries are projected to shrink from $13.1 billion in 1999 to $9.1 billion in 2000.

When all private money entering and leaving the five countries is added up, it results in a stunning net outflow of $22.4 billion this year, most of it loan repayments by indebted companies.

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