Malaysia’s polls put failure to roll back state intervention in economy on agenda
WAN Ibrahim, MD of Malaysia’s UEM Land, thought it was a “match made in heaven” when his state-linked property firm bought out Sunrise, a successful property developer owned by ethnic Chinese, in 2010.
Critics, however, saw it as a sign that Prime Minister Najib Razak’s promise to roll back the state’s overbearing influence in business and dismantle polices favouring ethnic Malays was already ringing hollow less than a year after it was made.
Mr Najib will this month fight what is shaping up to be the closest election in Malaysia’s 56-year postcolonial history. Despite his promise, state-controlled firms remain stubbornly dominant in Southeast Asia’s third-largest economy and are even moving into new sectors such as property.
Some high-profile government divestments turned Kuala Lumpur into Asia’s listings hotspot last year. But the enduring role of Malaysia’s “GLCs” (government-linked companies) is stunting the private sector and entrenching an economic malaise dating back to Asia’s 1997-98 financial crisis, according to a study by two Asian Development Bank economists.
“They can present evidence that they are divesting and yet move into new sectors and move vested interests to new opportunities,” said Jayant Menon, one of the senior economists who wrote the report. “It’s classic politics.”
The GLCs are also central to policies favouring majority ethnic Malays over other races, including the economically dominant Chinese minority.
Mr Najib wants to double Malaysian incomes, by 2020 but the economists’ report is a sobering challenge to his contention that his government is breaking Malaysia out of its “middleincome trap”.
Mr Najib acknowledged in 2010 that the state’s overbearing influence on the economy was crimping Malaysia’s growth and dynamism. He says the private sector must “return to the driver’s seat” of the economy.
The government points to the $3.1bn listing of palm oil firm Felda last year and the $2.1bn debut of IHH Healthcare as proof that its plan to divest stakes in 33 firms is on track.
But critics point to an expansion of state involvement in other new areas, in particular the property sector, as evidence that vested interests within the bureaucracy and the ruling ethnic Malay party, the United Malays National Organisation, have held back Mr Najib’s early reform ambitions.
The Asian Development Bank economists say in their report that, under Mr Najib’s rule, the real record on state firms was “more of a diversification than a divestment”. It said the deterrent effect on private investment was contributing to Malaysia’s status as the only major Southeast Asian nation with net capital outflows.
“What we do know is that investment has slumped in Malaysia, both foreign and domestic,” said Mr Menon. “The fact is there is a net outflow of capital in a country that transformed itself with huge inflows in the past. Surely there is something terribly wrong there.”
Private investment levels in Malaysia have picked up under Mr Najib but have never fully recovered from the Asian financial crisis in the 1990s that signalled the end of rapid growth fuelled by exports and high foreign direct investment.
Mr Najib dissolved parliament on April 3, paving the way for an election within weeks where he hopes to regain the two-thirds parliamentary majority the United Malays National Organisation-led coalition lost for the first time in 2008. He came to power a year after that debacle.
In early 2010, he set out a transformative “New Economic Model”, pledging the government would move away from being an “orchestrator” of the economy to being a “facilitator”.
One stated goal of the planned 33 divestments is to help increase the share of national equity held by Malays to a longstanding target of 30%. So far, 15 have been completed, but the pace slowed to four last year from 11 in 2011.
Announcing the 2012 report card for his economic programme last month, Mr Najib hailed a 22% rise in private investment, com- pared with a 12% gain the previous year. That, however, includes spending by the GLCs. Total committed investments under the programme fell to 32-billion ringgit ($10.2bn), down 82% from 179billion ringgit in 2011. Foreign direct investment fell 26% to 29.1billion ringgit last year.
GLCs play a big role across Malaysia’s economy, taking up 56% of banking assets, 67% of the communication sector and 88% of utilities, according to the Asian Development Bank.
Defined as companies with commercial goals but with some state control over decisions, they include Malaysia’s two biggest banks, CIMB and Maybank.
Seven out of Malaysia’s top 10 listed companies are majorityowned by the government, and GLCs make up about 36% of the stock market’s capitalisation.
Their political role has also been underlined ahead of the poll, with Mr Najib announcing 40,000 Telekom Malaysia and postal group Pos Malaysia workers would get a 500 ringgit ($160) bonus. He also authorised a bonus of 1,000 ringgit for the 40,000 employees of state oil giant Petronas. “They will think of it as a form of national service,” said an analyst with an investment bank in Kuala Lumpur, who declined to be identified.
A flurry of recent moves by GLCs into Malaysia’s property sector, such as the $450m Sunrise deal, has expanded the state’s role in a sector traditionally dominated by Chinese business interests.
Teh Chi-Chang, director of the opposition-linked Refsa think tank, called them “backdoor nationalisations” that deter entrepreneurs in the sector.
In 2011, state investment firm Permodalan Nasional Berhad took a controlling stake in Malaysia’s biggest property firm, SP Setia Berhad. State-controlled plantation Sime Darby became the largest shareholder in property developer E&O that year.
The three-party opposition alliance, led by former deputy prime minister Anwar Ibrahim, has an outside chance of upsetting Mr Najib’s coalition, according to opinion polls. The alliance points to the expansion of state-linked firms as evidence Mr Najib’s reform agenda has stalled.
“Malaysia has one of the most vibrant private property sectors in the world and yet you have the government getting involved,” said Tony Pua, a leading opposition politician. “There’s no point in having our GLCs competing on building luxury homes,” he said.
Malaysia’s GLCs have increasingly gone international in their hunt for yield, despite the government’s insistence that there are bountiful investment opportunities at home.
A consortium including Sime Darby, SP Setia, and Malaysia’s Employees Provident Fund, bought Britain’s Battersea power station for more than $600m last year and plans to build luxury flats on the site. That helped to put Malaysians ahead of Russian oligarchs and rich Chinese on the list of the biggest buyers of London property in the first seven months of last year. Reuters