What Have We Learnt? Foreign investors look at what is going on and wonder if this is really a market that they can or should take seriously
by Ram
There is an unmistakable sense of resignation, almost despair, in Kuala Lumpur these days. The economy, we are told, is growing at an exceptional rate, likely to cross 8% this year. Exports are strong, industrial production is stronger. Foreign direct investment had been soft but latest figures seem to indicate that it is picking up. The financial crisis, it would seem, was just a temporary nightmare. We have now awakened and are bouncing back, we should like to think. But are things back to how they used to be?
What have we learnt from the financial crisis, if anything? Why is the middle-class in Kuala Lumpur restless and discontented? Something is not right. The main stream media may repeat and report what leaders say, but in not providing an analysis on what has gone wrong in our society and economy, they fail us yet again. And they do the nation no service by their pretended blissful ignorance.
All Is Still Not Well
If we need any real concrete sign that all is not well at least financially, we need only look at the stock market. Having briefly crossed 1,000 in February, the KLCI is now back down to 700. That 30% loss in the market over the last eight months has knocked off RM180 billion from in the value of Malaysian equities, a great loss largely for Malaysian shareholders within a matter of months. While other markets have come back close to their levels before the crisis of 1997-98, our index is 55% of the 1270 level in February 1997, just before the financial maelstrom hit the region.
But the stock market is just one indicator. There is a greater malaise that one senses when there is any discussion on politics. UMNO, to its credit, has become more candid. Its leaders now openly speak about the loss of Malay vote and that something has to be done to halt this. But consider for one moment UMNO's position. This party which was formed and whose reason for existence is still to uphold Malay rights, is now in power only because of the non-Malay vote. That is an incredibly precarious position that UMNO now finds itself in. It is not sustainable - but no one is really sure how things will develop from here.
A Large Middle Class
But Malaysia has one major advantage over, say, Indonesia. It has a relatively large middle class. Historians may in retrospect judge this to be Mahathir's greatest achievement. By creating a sizable urban middle class, a source of stability is created. The middle class has prospered largely with the way things have been; hence it is worried about any major change in the order of things. Thus, representatives of this class are not likely to go down to the streets and protest, even if they find much to protest about.
Yet the middle class is not intellectually dead. They too read, think and reach conclusions. They wonder about the judiciary. Is it just a joke that we have "the best judiciary that money can buy"?
What are we to make if a High Court judge rules that a witness is "impeccable" who, under oath, gives three different dates for certain events to have occurred and then also says that the police had coached his evidence?
What are we to make of a chief judge who goes for holidays arms-over-shoulders with a counsel famous for getting cases go his way � so much so that the judge has to belabour over who really paid the bills?
And what do we make of a government that sees no reason why this should prevent such judges from having their terms extended?
Our leaders tell foreigners that the decisions made by our courts are an internal matter and that our judiciary should be respected. But the force of the old saying, that justice must be done and seen to be done, thus comes to be felt. If the rakyat does not see justice being done, telling them that these are the judgments of our courts that must be respected, undermines confidence in the whole system. If this is justice ala Malaysia, are we safe? The late Tun Suffian Hashim said just a few months before passing away that the way our courts have become, he would not want to be tried by our judges particularly if he were innocent.
The middle class owes much to Mahathir and his government � and they know it. But they read the Anwar trial and doubt if the evidence really did show that Anwar was a homosexual � be it that our to-be-esteemed judges say they were convinced. Many Muslims wonder, if Anwar is put away on the evidence of a former driver who himself was caught for khalwat in the midst of the first trial, whether this is sufficient evidence for a fellow Muslim to believe such an accusation. What happened to the requirement that such accusations need four impeccable witnesses?
An Uneasy Situation
How long can the conscience of the nation allow a former national leader to languish in jail on convictions that do not convince the majority? Can those who have put him there comfortably leave the scene? But these are the questions � not usually expressly articulated � that are at the back of the minds of the middle class. It prefers the status quo, but it also senses that the status quo is not sustainable. That is an uneasy position that the nation is in.
Yet if we just read the New Straits Times with its rather nice new colours, or the same old Star, or even the brand new Sun, we would have no clue that there are serious challenges that now confront the nation. Hence the middle class loses confidence in "the facts" as presented by the mainstream media. On political events the newspaper leads are usually verbatim what the politicians of the day tell them. Hence, when arms are taken away from military camps apparently by an Islamic sect, many do not believe the official line.
It is a serious problem for the party in power when they have so little credibility. It is a very serious problem for the nation, if a part of the population � specifically middle class non-Muslims - see no option. Hence many continue to vote in a party they no longer trust.
It is too easy to blame the malaise on the government. Too easy and wrong. In the last elections, Malaysia was let down by the opposition politicians too. Many, perhaps a majority of non-Muslims, were not willing to vote for an opposition that appeared to be led by a fundamentalist Islamic party. Opposition party leaders looked at the Barisan Nasional formula which appears to have worked so well over the forty odd years since independence. The opposition paid the government the inadvertent compliment of seeking to copy its formula, by creating a Barisan Alternatif. But those who wanted a change in government are not interested in another Barisan. Malaysia may be heading eventually to a system of coalition government, but that does not mean that it has to be one Barisan or another.
The Lessons
What are the lessons to be learnt from the political and financial crisis of the last few years? Do the government and the judiciary realize that justice must be seen to be done � without recurrent resort to contempt of court threats? Do our leaders see that as the middle class grows and Malaysians become more sophisticated, we need a judiciary of ever improving competence and quality � or Malaysians will feel uncomfortable about the administration of justice. And when that happens, even without critical analysis by an ever-compliant media, the credibility of the leaders will suffer.
What are the economic lessons? It is easy � again too easy � to blame foreign speculators for getting us into a mess. Certainly foreign investors in the market seem to have panicked when they threw away their holdings of Malaysian equities and that led to an 80% fall in our market and a 50% decline in our currency. But one need only drive around the Klang Valley to see the conditions that investors woke up to and became jittery about. Apartment blocks completed but empty, hotels are half-finished but now abandoned, and the shopping malls continue to be built at a snail's space because their developers are no longer sure that they will be able to rent the space out.
Reckless And Crazy
The government was reckless to have given projects, like the Bakun Dam, to companies that had absolutely no experience in similar projects. Ekran, which was awarded the RM14bn project without even competing through a tender process, could not then even sign a proper bankable contract with international equipment contractors like ABB. Conglomerates were crazy to have continued taking on debt to expand their assets with almost no concern about whether they would be able to survive a downturn. Stock market punters were stupid to gear up and go big in the market betting on companies whose businesses they hardly understood and whose value they had no clue � then losing their shirts when the foreign investors were the first to twig that market valuations were excessive and pulled out in concert.
And Have We Learnt?
Have we learnt the financial lessons? Not by the way mega projects are now being revived. The Bakun Dam, we now see, will be built afterall even if it might cost RM20 billion now rather than RM14 billion earlier. Corporates have not learnt that investors want to invest in management that focus on their core business strengths rather than foray into new ventures where they have no expertise.
Corporate governance remains probably the single biggest reservation that foreign investors have preventing them putting increased funds in the market. Would professional investors, who have a choice of growth markets all over the world, really want to put much money in a market where cash-rich companies cut their dividends to go on lending larger amounts to their cash-strapped major shareholder?
Or where the banks are suddenly told to merge or possibly risk losing their licence, with investors then having to guess which of the banks will really make it to the final list?
Or where the country's major telecom company at one stage decides it will make an offer for up to RM8bn of shares of mixed quality (CLOB) that would be equivalent to 60% of its own total share capital and hence transform itself into being the largest equity investor among telecom companies in the world?
Or where the country's main power company decides to split the position of Executive Chairman into two separate roles but only informs investors after the fact when the former Chairman leaves apparently unhappy about a politician coming in to be his new boss?
Foreign investors look at what is going on and wonder if this is really a market that they can or should take seriously.
Time To Remove Controls?
But have the exchange controls not served us well? Yes, the ringgit does not fluctuate any more � against the US dollar. But if the dollar appreciates against other currencies � as it has over the recent months against the pound, the Euro, and the Aussie dollar among others � then our ringgit also moves up against these currencies. We then start to lose the competitive advantage of a relatively cheap currency.
Should our currency value against all the other currencies in the world be dependent on what currency markets value the US dollar at? It is easier to maintain the fixed rate while the ringgit is undervalued, but if the dollar moves up and the ringgit becomes overvalued against other currencies, there will be a massive outflow as locals look for ways to get their ringgit out. Instead of gradual daily changes in the value of the ringgit, when it changes next it will be a big move that the government decides on. Those who believe in market forces will take the view that the government is less likely to know what the true value of a currency (or any other commodity) is, than what the market will trade it at, based on supply and demand.
The exchange controls gave us short-term relief. By fixing the currency at a relatively cheap rate, and placing some controls on outflow, Malaysians did not even think about taking their money out. So interest rates could be pushed down to give relief to heavily indebted borrowers. But as this is maintained, while the ringgit moves with the dollar and gains value against other currencies, some will think it is better to keep their money outside in other currencies where they will get a higher interest. There is evidence that our exporters are already not bringing their dollars home: while we continue to record large monthly trade surpluses of over US$1 billion (RM4 billion), since May our foreign reserves have actually fallen by US$ 2.2 billion.
An elementary lesson taught to pre-university economics students is that a government can control either interest rates or the exchange rates, but not both. Essentially, that is because trying to hold one results in forces building up on the other. But our central bank believes that it can control both. Economists will warn that this will lead to distortions. And one distortion is already being seen. Despite the real economy picking up with fairly strong growth, the stock market is nearly dead � because there is not enough of what market participants call "liquidity". Exporters not bringing back their earnings is reducing the amount of money available to go into the stock market and other parts of the economy.
The exchange controls were a quick fix. They were almost like morphine to ease the pain of the financial turmoil. But if we get hooked on them, we will not become steady enough to stand up straight commercially. Most of Malaysian businesses are still feeling groggy. Eventually the intoxicant must be removed. Companies that can survive with market determined interest and exchange rates are those that should; those that can't, if supported and shielded indefinitely, will continue to be a drag on the economy.
Reformasi In The Opposition?
What about the political opposition? The next general elections are probably four years away. Will the opposition coalition be unwound in the mean time? If opposition leaders think that the only way to win an elections is to copy that Barisan Nasional strategy of forming a Barisan, they will continue to help Barisan remain comfortably in power. For, in spite of the BN's wrongdoings, many non-Muslims and a large proportion of the middle class will not vote for an opposition that is led by PAS in its present form. There must therefore be rethinking among the political opposition. Instead of pursuing more exclusive policies in Kelantan and Terengganu, perhaps PAS ought to ponder whether it is time for its own reformasi. This is called for if it is genuinely interested in winning over non-Muslim support. But it is understandable, why PAS would not want to undergo this reformasi.
The opposition can still come to an agreement on the number of seats where they will not contest each other. An electoral pact (division of seats) that is not tied to a common platform (manifesto) is another way for each of the opposition parties to build their own appeal. And if they then together win sufficient seats, they can negotiate among themselves � or with some of the existing component parties of the Barisan Nasional � to form a government that enjoys sufficiently broad support from the people.
We live in uncertain times. The government cannot control the media the way it used to because of the Internet. Local businesses cannot remain protected forever because of the forces of globalisation. UMNO cannot remain comfortable staying in power mainly on the non-Muslim vote. The DAP and other opposition parties cannot remain in an alliance with PAS if they do not want to become marginal electoral players (just as the other parties in the Barisan Nasional arguably already are). And our economic policies have to be overhauled if we are to become competitive globally.
How will we move to the new equilibrium? Quite certainly in fits and starts, with new formula makers stepping in. Uncertain times can be depressing for some � but will offer incredible opportunities to others. We live in interesting times.
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PAS is clearly gaining political ground. That is of no comfort to UMNO. But neither does it reassure the middle class - or at least a proportion of the middle class - of the country. Many non-Muslims are clearly concerned that Malaysia might one day become an Islamic state, as PAS continues to pursue its objective. And many liberal Muslims, too, in particular young educated Muslim women, wonder if an Islamic state is the kind of country that they would like to live in. And an investor looking at the political situation, wondering whether UMNO will go the way of Golkar, or the LDP in Japan, or Congress in India, will be very cautious about investing huge amounts setting up factories here, if religious clerics may one day come to power.
The insane over-building in the mid-nineties was just but one of the conditions that made us vulnerable to a financial meltdown. The developers, and purchasers, were never going to get a positive return with the amount of building going on. The bankers were crazy to have lent them the money. Infrastructure companies were mad to take on "mega" projects that involved huge debt where the main aim was upfront construction profits where the medium- and longer-term cashflows were just a guess.