The Business Times, Singapore 26th March 2001

But it sees this as a way of cushioning economy against global slowdown this year

MALAYSIA can afford to loosen its purse strings to pump prime the economy, but the government could pay a political price as people question how their money is spent after a series of costly corporate bailouts.

The finance ministry is expected to seek parliamentary approval this week for an additional 1.5 billion ringgit (S$703.5 million) to finance projects not included in the original 2001 budget in October last year.

The economic benefits of some of the government's big projects, like the newly revived Bakun dam project in Sarawak, have raised some doubts as to whether it is money well spent. But the government sees its increased spending as a way of cushioning the economy against the global slowdown this year.

It has also defended its rescues of ailing corporates, blaming the Asian economic crisis of 1997-98 for their woes. Prime Minister Mahathir Mohamad has said the government cannot allow big corporates to go under as a lot of people will suffer.

And compared with most Asian countries, Malaysia's fiscal management, on a broad macro basis, is pretty sound. "The ratio of public debt to gross domestic product in Malaysia is about 37.7 per cent while in Korea it is 75 per cent and Thailand nearly 60 per cent," said Prasenjit Basu, chief South-east Asia economist at Credit Suisse First Boston. "But the irony is that since the government can afford to do so (bail out companies) and continues to do, it can lead to two types of negatives."

Economists warn bailouts could prompt foreign portfolio investors to steer clear of Malaysian financial markets because of uncertainties about related corporate governance issues. "Secondly, considerable political heat can be raised by the opposition," Mr Basu said.

The four-party opposition Barisan Alternatif, which came close to upsetting the two-thirds majority held by Dr Mahathir's coalition at the last election in November 1999, is aggressively playing up what it calls a misuse of public funds.

Opposition activists began a campaign this month to tell people how their money -- often through state-controlled retirement funds -- is used to to bail out favoured businessmen.

"I think people are more aware now and are worried about how their pension funds are being used," Rustam Sani, vice-president of opposition Parti Rakyat Malaysia, said.

The government has come under fire after state-run pension funds backed a disappointing initial public offer by Time dotCom last month and also helped rescue some influential businessmen with close links to the ruling alliance.

The pension funds have defended their actions, saying they swapped debt owed to them by Time dotCom parent Time Engineering for an equity stake in the telecom.

The government also recently purchased the assets of ailing light rail operators for RM1.6 billion and a 29 per cent controlling stake in the Malaysian Airline System (MAS) for RM1.8 billion from tycoon Tajudin Ramli.

Finance Minister Daim Zainuddin justified paying RM8 per share for the MAS stake, double the market price, by saying it came at a premium because it carried management rights.

The government will tap local and international bond markets to raise funds for the infrastructure projects, which it sees boosting domestic demand in the face of a global slowdown. But analysts caution that funding the expensive schemes could suck out money at a time of local financial market consolidation.

Steven Hess, vice-president and senior analyst at Moody's Investor Service, said that there was a possibility the budget deficit could overshoot government target for the year.

When the government uses state money, such as through the pension funds, to bail out a company it does not directly affect its fiscal position. "However, we believe that such transactions do weaken the financial strength of public entities engaging in them and, therefore, do increase the potential contingent liabilities of the federal government," Mr Hess said.

Malaysia expects to cut its fiscal deficit to 4.9 per cent of gross national product in 2001, down from 5.9 per cent in the previous year. But that target was set last year when Malaysia expected its economy to expand by 7 per cent in 2001. The central Bank Negara is expected to revise the growth target downwards when it releases its annual report later this month. -- Reuters