Cautious and reserved international reaction to the  "exit tax" announcement by Daim shows that Malaysia is not out of the woods as far as restoring international investor confidence is concerned

(Petaling Jaya, Friday): The cautious and reserved international reaction to the "exit tax" on the repatriation of portfolio capital and profits following the introduction of capital controls last Sept. 1 announced by the Finance Minister, Tun Daim Zainuddin, yesterday shows that Malaysia is not out of the woods as far as restoring international investor confidence is concerned.

The Prime Minister, Datuk Seri Dr. Mahathir Mohamad, Daim and the  National Economic Action Council (NEAC) must be surprised at the less-than-euphoric welcome by the international financial community to the "exit tax" announcement.

While fund managers in America, whose funds constitute the bulk of foreign portfolio investment in Malaysia, doubt that the easing of a key component of capital controls will result in a fast exit of foreign money from the country as "You'd have to be desperate to take your money out to take such a big hit", there is also little optimism that  the new measure  will stem eventual outflows from the country.

This cool reaction is typified by a specialist United Kingdom broker dealing with large numbers of fund managers that purchase Asian shares who commented:  "The bottomline is, present investors holding Malaysian shares in their portfolio will complete their year of waiting and get out."

The following reaction on the Internet is a fairly representative one which warrants serious attention by the authorities:
 

"It's hard to see how foreign investors will come rushing into Malaysia with the changes to capital controls recently announced. The fact is that investors' confidence have already been severely damaged with the imposition of draconian controls in September 1998 that trapped large amounts of foreign investments in the country.

"Who wants to invest in a country where the rules can change suddenly, without warning and even retrospectively? Who knows whether the 30% exit levy on short-term investments will remain as it is or increase tomorrow to 50%? Will the 10% profit tax on long term investments increase to 20% suddenly? Would you want to put money in a bank that will suka-suka impose exit levys and profit taxes and backdate these for those who had previously deposited under a different set of rules?

"The Malaysian government has had a long history of insulting the intelligence of its citizens. It appears to think that the international community is composed of fools as well."

The National Economic Action Council has failed to gauge properly the magnitude of the damage the capital controls have caused to international investor confidence in Malaysia and it should  go back to the drawing board to consider further loosening of the capital controls to fully restore investor confidence.

For a week, government leaders had been trying to talk up the stock market with expectations of positive responses to the exit tax announcement.  Although the press reported that the Kuala Lumpur Stock Exchange (KLSE) closed higher yesterday as a result of "Renewed buying interests, fuelled by the exit tax announcement", in actual fact, the KLSE  Composite Index (CI) started to fall from its morning high immediately following Daim’s announcement of the exit tax.

The crash of the stock market today  falling by 14.24 points to 563.08  at 3.20 p.m.are further negative market responses to the exit tax announcement and should be further food for thought to the NEAC.
 
In this connection, the war which the government has declared on the foreign news organisations seems to be most unfortunate, resulting in a CNN headline on Daim’s announcement on "exit tax": "Malaysia woos foreign money, shuns  foreign press"

Daim banned the foreign media representatives from his news conference at the Prime Minister’s Department  yesterday where he  announced that the  12-month holding rule on  the principal of portfolio investments would be replaced by a system of taxes on principal and profits.

When is the Malaysian government going to realise that the strategy to regain international investor confidence must include a plank to restore the confidence of the international news media, or efforts to regain full foreign investor confidence will never reach their optimum level especially in this era of information technology.

DAP calls on the government to conduct a full review of its policy vis-a-vis the foreign news organisations.

Malaysia needs an Information Minister who can begin to win friends in the international news organisations instead of one who can only call on Malaysians to boycott foreign magazines, which is a typical pre-IT mindset uncompletely out of keeping with the needs and challenges of an information society.

(5/2/99)