NAJIB SHOCKS with capital controls talk, bolstering fears of BIG TROUBLE AHEAD for Malaysia

KUALA LUMPUR - Prime Minister Najib Razak raised eyebrows when he said during an interview that Malaysia would not impose capital controls but at the same time refused to discount the possibility that his government would freeze the local markets as a last resort to prevent capital flight.

"Chances of a default is minimum. Despite our money leaving, our reserves are more than enough compared to what we had during the financial crisis in 1997," national news agency Bernama reported him as saying during a recording at the CNBC Summit Conference. The clip will be aired over the business network at 5pm tomorrow.

Reserves higher now, but so is corruption while national debt is at record-high

Najib, who is also Finance Minister, also said that Malaysia's current reserves stood at US$130 billion compared to below US$30 billion in 1997, the year that the Asian contagion or Asian Financial Crisis had snaked into the Southeast Asian region, depressing the economies there for more than a decade.

At that time, foreign speculators such as George Soros had thrashed the Thai, Indonesian, Philippine and Malaysian currencies, making mince-meat of these economies. All 4 nation suffered sharp pullbacks to their socioeconomic progress, rocked by the unprecedented capital flight. Only Singapore was spared, staying relatively unscathed due to its low debt levels and a sturdy administration that was perceived as being 'squeaky-clean'.

Malaysia, gripped by endemic corruption and protectionist policies, was badly hit. Malaysians saw their ringgit depreciate from a 2.45 high against the US dollar to as low as 4.30 but the then prime minister Mahathir Mohamad refused to follow the IMF and World Bank prescribed austerity measures.

Instead, Mahathir slapped on a series of capital controls on the local currency and stock markets. Trapped overnight, many of the world's largest investors lost billions and vowed never to return to Malaysian shores, other than as hot money and for quick punts on the ringgit or the FBM KLCI share index.

Deja-vu: Badly managed, priorities all wrong, vested interests placed first

Fast-forward to 2013, and against the backdrop of the financial crisis gripping India and threatening to blow over to the rest of Asia, it may be deja-vu for Malaysia.

Despite promises to reform, Malaysia's national debt has climbed even higher than it was in 1997. Pledges to weed out corruption in the government and private sectors, scrap protectionist policies, including affirmative action policies that favored select communities, have been sacrificed on the altar of maintaining political power.

And following Najib's shock unveiling last Saturday of additional policies to specially benefit his Malay community, concern has risen even higher. Dark clouds now loom large over Malaysia's prospects and its continued viability as a key destination for serious foreign investment.

Many critics and investors have warned that such policies smacking of protectionism and racism are against the current global trend of economic integration and inclusiveness. They reckon it could set Malaysia backwards by at least 2 decades. Najib's failure to lay in fundamental and structural reform to the economy may also trigger more international agencies to follow Fitch in downgrading Malaysia's outlook to 'NEGATIVE'.

Already, the local currency and stock markets have been victims, although their falls have been tempered by positive news coming out from overseas markets and intervention by Najib's government-linked funds.

"We have always been warning the country is very badly run. All the priorities are being placed in the wrong places. This is why when Najib promised to liberalize the economy, replace the New Economic Policy with the New Economic Model, he was greeted like a hero by investors. Only the hardline warlords in Umno were unhappy and the irony is that these are ones who are richest. These are the ones who jet-set and buy properties in London, Paris and what-not. But the poor get poorer," MP for Wangsa Maju Tan Kee Kwong told Malaysia Chronicle.

"I just want to add the example of Norway, one of the smallest nations in Europe. Yet, they manage their oil wealth so well that their pension fund is the largest in Europe. Where is our Petronas and what has happened to all its resources? All these factors, especially with the latest Bumiputra Economic Empowerment plan which is actually NEP3, can only seal the feeling of hopelessness about the Malaysian government's ability and will to take the bull by the horns and make decisions that are right. This is why Najib may fear a capital flight. Not only are the non-Malays upset and unhappy, tell me which foreign multinational can hope to reap a good return when the government here allows racial favoritism to over-ride the law, even to the extent of making a mockery of the Federal Constitution. To me and to many others, it is obvious that what we have here is already the same as in Myanmar or Zimbabwe - which is governance by might is right."

Zero strategy to move forward: Opposition offers to help with national dialogue

It no coincidence that the political Opposition in the country led by Anwar Ibrahim has reiterated their call for a national dialogue with Najib's beleaguered Umno-BN government.

"The Pakatan Rakyat leadership council convened on 18 September 2013 has agreed to express its willingness to hold a dialogue with the Barisan Nasional coalition for the purpose of solving the problems overtaking the country, such as the mounting debt load, sharp rise in prices of goods, crime and racism threaten to destroy national harmony," the tripartite Pakatan said in a statement released on Thursday.

However, it is unlikely that Najib or his Umno party will accept the invitation as to do so would be to acknowledge that there are indeed 'problems'.

So far, the Najib administration, has closed an eye to criticism, with key leaders in the Umno party openly rebuffing calls for "reconciliation" as desperate strategy from the Opposition.

Najib himself says Malaysia's economy was resilient compared to other countries in the region due to its strong reserves position, coupled with high savings in the Employees Provident Fund (EPF), Tabung Haji and Kumpulan Wang Amanah Pencen.

"It is obvious the Umno-BN will remain stuck in their comfort zone. They won't admit any fault until it is too late and the whole country falls into a vicious down-spiral. In this day and age, to one weekend announce political largesse in the form of cash aid and special incentives to the Malays and then just a few days after, talk about capital controls - even as a last resort - shows that Najib has failed as Finance Minister. He has zero cohesive policy and zero strategy to take Malaysia forward. He should be sacked or made to give up the portfolio to someone else more capable," MP for Batu Tian Chua told Malaysia Chronicle.

Malaysia Chronicle