Thomas White Global Investing
Malaysia
Malaysia Stamp
July 31, 2009
A Postcard from the Asia Pacific
Malaysia: Glad Tidings of Reform

Malaysia

As the fastest growing city in Malaysia, Kuala Lumpur has attracted immigrants from around the world, resulting in the city having a diverse mix of ethnic backgrounds ranging from Chinese to Indian to Indonesian and others.

When Malaysian Prime Minister Najib Razak was sworn into office on April 3, 2009, he promised to introduce bold reforms that would transform Malaysia’s economic landscape. Few listened. Fewer still believed him. Yet barely a few months later, Najib has introduced reforms that no other prime minister before him has dared to undertake, in a sweeping liberalization program.

Chief among Najib’s changes is a repeal of laws that demanded that ethnic Malays must hold a combined 30% stake in foreign companies. Now, the quota has been cut to 12.5% for newly-listed companies, while foreign companies seeking to list on the Kuala Lumpur stock exchange are no longer bound by the quota system. Foreign investors are also allowed to own 70% of local stock brokerages, increased from the present 49% limit.

The Prime Minister is looking to restore Malaysia to its glory days in the early 1990s when the Kuala Lumpur stock exchange was the largest in Southeast Asia by market capitalization. At that time, investors were eager to enter the country but were hampered by Malaysia’s complex preference programs. These date back to 1971 when Malaysia introduced its New Economic Policy, or NEP, an experiment in social engineering. The NEP ushered in a new society where Malays or bumiputras were given a canopy of privileges including reservations, quotas and subsidies.

Ironically, it was former Prime Minister Abdul Razak, who introduced the same laws that Najib Razak, his son, is now seeking to overturn. These laws were meant to uplift the economically disadvantaged Malays but were deeply resented by the Chinese and Indian minority populations. The policy was an instant political success but economically, the results were mixed. In an increasingly globalized world of equal opportunity, the policy was proving to be slowly unsustainable.

But juggling the economic rewards and political backlash may prove tricky for Najib. Despite a surge in his ratings since the move, he has been quick to assure the Malays that they will continue to obtain preferential access to universities, cheap loans, and civil service jobs. While abandoning the NEP policy completely may well spell political disaster for Najib’s United Malays National Organization (UMNO) party, investors have welcomed the reforms. Already, the rewards are trickling in. Through its sovereign fund, Abu Dhabi has promised to increase its investments in Malaysia with a fund of $1 billion.

No doubt, Najib’s action was prompted by a deteriorating economy and declining foreign investment. Yet his bold initiatives also prove that countries are willing in these tough times to encourage reforms, and promote openness in ways that no one could ever have foreseen before the world financial crisis. Already, India is planning to introduce liberal reforms of its own under Prime Minister Manmohan Singh. Hungary also introduced several budgetary reforms, including a major overhaul of its tax system that aims to enhance the country’s competitiveness. In these times of a global recession, Malaysia has shown that rethinking old policies and enticing investors can create new era of promise and growth.

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