Tuesday, October 23, 2007

In Malaysia, Foreign Investment Rebounds But Local Capital Is Leaving

Malaysia is celebrating a big rebound in foreign direct investment into the country, but the real news is that local capital is leaving just as fast.

Local businesses, including many oil companies flush with cash, are investing offshore like never before - a trend that showed up in startling UN investment figures issued last week.

The trend is already making itself felt in monetary policy and could hasten reform of corporate Malaysia, analysts say. In time, it could even expose the country's affirmative-action policy to stronger winds of reform.

The data showed that inflows to Malaysia rebounded in 2006 to a 10-year high of just over $6 billion after years of dwindling investment. The real surprise, though, was that outflows equaled them, with the highest total since UN records started in 1980.

And it is not a statistical blip: After more than 20 years of averaging about $1.3 billion in annual outgoing direct investment, outflows began to steadily pick up in 2003, according to data collated by the UN Conference on Trade and Development. "I think the business case is very, very compelling," said Eric Fishwick, deputy chief economist with the investment bank CSLA, referring to the rise in offshore investment by Malaysian firms.

He said Malaysia was still a relatively state-directed economy, which "just increases the incentive to look overseas and the incentive to raise your returns."

Malaysia's maturing economy offers smaller returns than some other, racier emerging markets like neighboring Vietnam, but economists say this is nothing new. The real change, they add, is that the government now encourages many companies to go offshore.

The state-linked corporate sector, which once grazed happily at home, is now being pushed offshore by the state-owned investment group Khazanah, which has begun to emulate its Singapore counterpart, Temasek, in building up a large overseas portfolio.

Khazanah has invested about $1.7 billion overseas since May 2004, more than a quarter of its total investment in the period. That is in addition to investments made by its stable of firms. One of them, Telekom Malaysia, has bought businesses from India and Sri Lanka to Indonesia and Cambodia. Another, CIMB bank, is buying up offshore banks.

Oil-and-gas companies, state-linked and privately owned, are also expanding amid a boom in global oil exploration - and often following in the wake of the state-owned oil company Petronas as it expands in Asia and enters new markets like Africa and Russia.

"Our competitors not only operate locally in Malaysia but globally as well. So for us to remain competitive, we too must work hard to grow our market share," said Chan Cheu Leong, chief executive of the oil-services firm Wah Seong, which nows draws 70 percent of its revenue from offshore.

But what are the consequences of this rush to send money overseas for an economy traditionally geared to receive it?

Malaysia has for many years curbed the strength of its currency to help exporters and encourage inward investment, but authorities appeared to adopt a more flexible stance early this year, saying it favored a steady appreciation in the ringgit.

A stronger ringgit is further encouragement to invest abroad but, says the CSLA economist Fishwick, outward flows also serve as a hedge against a rise of inflows and an overheated currency - something the central bank refers to as healthy "two-way flows."

The push overseas could help transform corporate Malaysia, especially in the case of state-linked firms, as it adapts to more cut-throat competition in the global marketplace.

It could also put more pressure on the government to rationalize its own investment policies, such as affirmative action, said a Western diplomat specializing in economics.

Under affirmative action, businesses owned by ethnic Malays are given preference for state contracts. Overall, listed firms are required to be owned 30 percent by so-called Bumiputras ("sons of the soil"), who are Malays or indigenous people.

Critics say the policy has created an elite of rich Malays and failed to close the wealth gap between Malays in general and the ethnic Chinese minority, which still dominates business.

Opposition parties blame it for both driving ethnic Chinese capital overseas and turning off foreign investors. Despite the jump in inward investment last year, UN data showed that Malaysia had only improved its global ranking by two rungs to 64. In terms of outward investment, its ranking jumped eight rungs to 22.

"Why not rationalize your own investment policies to match the kinds of policies your own investors are responding to?" the Western diplomat said, noting that local firms were responding to bigger opportunities in less restricted markets offshore. "That's the driving economic motivator behind all of this," he said. (Mark Bendeich, International Herald Tribune)
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