Published February 24, 2009

Foreign investment rules to be relaxed; NEP to stay

KL to limit role of panel that vets and approves proposed investments

By PAULINE NG
IN KUALA LUMPUR

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MALAYSIA does not think the worldwide recession is a reason to scrap its New Economic Policy (NEP), but it is prepared to be more accommodating to foreign investors, particularly in the services sector, International Trade Minister Muhyiddin Yassin said yesterday.

Weak link: Malaysia's concession to foreign investors comes after its exports slump dramatically and are expected to worsen this year

This concession comes on the heels of a dramatic slump in exports, which under the government's worst-case scenario could shrink up to 4 per cent this year.

At an economic briefing yesterday, Mr Muhyiddin hinted at new guidelines for Malaysia's Foreign Investment Committee (FIC), aimed at making it easier for investors.

BT believes the role of FIC - a unit in the Prime Minister's Department that vets proposed investments - will be curtailed to monitoring six areas of national interest.

Other areas will be placed under individual ministries, which will have to spell out investment requirements clearly on their websites.

FIC has been criticised for the way it approves proposed investments. As a rule, they have to comply with a core NEP requirement that 30 per cent of the project is owned by bumiputras. Critics have charged FIC with opaque decision-making. Bumiputras - mainly Malays - comprise almost 65 per cent of the population.

'We acknowledge at a time like this there must be some areas we can liberalise, that Malaysia has lost some ground which we want to expand,' Mr Muhyiddin said. The services sector is very important but over the years it has not been as open as it could be, he said.

He wants to see the sector's contribution to gross domestic product (GDP) expand to at least 70 per cent from about 50 per cent now. Media reports have said that under new guidelines yet to be announced, foreigners will be exempt from equity conditions in distributive trade services except hypermarkets.

Even so Mr Muhyiddin, who could emerge as the deputy prime minister after Umno's party polls in March, stoutly defended the continuation of the NEP. He said that since its implementation in the early 1970s there has been growth in all sectors. 'The policy doesn't hamper growth,' he said, before adding that 'maybe growth could have been faster.'

Critics of the NEP say this is precisely why the policy needs to be reviewed. Competition for foreign investment is now tight because other emerging economies have caught up.

Critics also disagree with official calculations which, based on par value, peg bumiputra corporate wealth at 19 per cent. According to some independent studies, using market value, bumiputras already own at least 30 per cent.

Since the implementation of the NEP in 1972, Malaysia has managed to expand the economic pie. But growth prospects in the coming years look dim, with the collapse in global trade a significant threat to export-reliant Malaysia.

Exports shrank 15 per cent in December 2008 from November and are expected to worsen.

At best, exports may see marginal growth of 0.5 per cent this year, given that global demand for electrical and electronic components and oil and palm-oil based products - Malaysia's top shipments - has virtually evaporated.

Whether domestic consumption can take up the slack depends on how well the government's stimulus policies work. But Malaysia has already conceded that its GDP forecast of 3.5 per cent is unrealistic.

Mr Muhyiddin said political squabbles with the opposition coalition have been a distraction, but the government is not in denial about the extent of the economic meltdown. 'We are not like Singapore where it has to dig into its reserves,' he said. 'We have sufficient resources and our economy is more diversified, reserves strong, and we still have a trade surplus.'