Commentary: Bond buyers are finally coming Malaysia&#039;s way
International Herald Tribune
September 22, 2004
William Pesek Jr. 

If you're looking for a reality check on Malaysia's economy, one can be found in the bond market. Last week, when Asia's 10th biggest economy sold five-year bonds, it drew bids 2.54 times the debt offering of 2 billion ringgit, or $526 million. The ratio, the highest in a government auction since June 2002, showed Prime Minister Abdullah Ahmad Badawi is winning the trust of bond buyers.
 
Lower debt yields often are an omen of economic troubles; here in Malaysia they're anything but. Investors are realizing Malaysia will be selling fewer bonds as the government steps up efforts to reduce the budget deficit.
 
While Standard & Poor's seemed underwhelmed by plans to cut the deficit to a six-year low in 2005, calling them "modest," bond investors seem more impressed. According to Abdullah, who also serves as finance minister, the deficit will decline to 17.7 billion ringgit, or 3.8 percent of gross domestic product, the lowest since 1999. This year's fiscal shortfall will drop to 4.5 percent of GDP, from 5.3 percent in 2003.
 
It's an important milestone, and one for which Malaysia should get more credit. After the 1997-1998 Asian crisis, the hallmark of its fiscal policy was ever higher spending. Now, says Rajeev Malik, an economist at JPMorgan Chase, "the key theme is an emphasis on fiscal consolidation," something that should "go down very well with investors."
 
The concern, says Philippe Sachs, a credit analyst at Standard & Poor's, is that Malaysia's planned fiscal adjustment "is modest in the context of stronger growth and higher oil revenues."
 
When the 7 percent growth expected next year is coupled with an improved environment for its oil export business, Malaysia seems to have ample ammunition to tackle the deficit more aggressively.
 
Yet Abdullah's first budget is a reminder that the man who has led Malaysia since late 2003 has reformist tendencies. He's pushing for a more market-oriented economy by opening the financial sector to additional foreign investment. His industrial policies lean toward supporting small- and medium-size enterprises over corporate giants. It's a plus for entrepreneurs.
 
Abdullah's predecessor, Mahathir bin Mohamad, put Malaysia on investors' radar screens in his 22 years in power. Mahathir turned an agricultural and mining backwater into a thriving economy that's now the production base for Intel, Dell and others.
 
Now, Abdullah is pushing the economy into the next phase of development. He's cracking down on corruption, demanding greater transparency, improving ties with neighbors and reviewing deals between politically connected business people and the government.
 
Education reforms are being stepped up, as are efforts to make the government more efficient when dealing with the business world. These steps are meant to attract foreign investment at a time when so much of it is flowing to China.
 
"It's very friendly to investors," said Dom LaVigne, executive director of the American Malaysian Chamber of Commerce. LaVigne predicted that the budget will pull more U.S. investment this way.
 
The forward-looking nature of Abdullah's policies is evident in his emphasis on Islamic finance. Officials here think the global market for products that reflect Islamic principles on lending and interest rates will bring Malaysia closer to being a financial hub. HSBC Holdings estimates the worldwide market for such products is worth up to $250 billion.
 
Malaysia's corporate bond market also offers evidence of rising investor confidence. Take a recent debt sale by Telekom Malaysia, at which Southeast Asia's second-largest phone company received excess demand for its bonds. Investors placed orders for 10 times the $500 million of bonds sold. The demand underlines improving credit trends here.
 
Seeing Telekom make a splash with investors prompted Genting, Asia's biggest publicly traded casino group, to increase a bond sale by a fifth last week, to $300 million. Moody's Investors Service may soon raise its rating on Petroliam Nasional, or Petronas, the state-owned oil company.
 
Malaysia has lots more to do to win the trust of investors. It needs to phase out its "rent-based" way of doing business; the politically connected get the big projects, while smaller players are left wanting. Removing the ringgit's peg to the dollar would demonstrate that officials have greater confidence in the financial system.

Tax reform is needed to attract more multinational companies. In 2007, the government plans to introduce a goods and services tax so it can cut taxes for individuals and corporations. In the meantime, Malaysia - with a corporate tax rate of 28 percent - is left at a competitive disadvantage to Singapore's 20 percent.
 
Yet Malaysia is a different place than it was during the Asian crisis. The recent release from prison of Anwar Ibrahim, the former deputy prime minister, is a measure of how far the nation has come.
 
Anwar's 1998 conviction on charges of sodomy and corruption never sat well with global investors; many felt Anwar's real crime was challenging Mahathir. His release earlier this month was a sign of a more independent judiciary than existed under Mahathir - a plus in the eyes of foreign investors.
 
Moody's said in May that it might upgrade its rating on Malaysia's foreign-currency debt if the government cuts the deficit further. The nation's sovereign debt is currently rated Baa1, the third-lowest investment grade.
 
With Malaysia addressing its fiscal position and setting the stage for a stronger future, one wonders what Moody's and other ratings companies are waiting for.

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