Malaysia PM sets big reforms to boost investment

Malaysia's Prime Minister Najib Razak delivers his keynote address during Invest Malaysia 2009 in Kuala Lumpur June 30, 2009.

KUALA LUMPUR (Reuters) - Malaysia's prime minister unveiled a raft of measures on Tuesday to boost investment in the slumping economy, coming close to ending an affirmative action programme for ethnic Malays that critics say has stymied growth.

Najib Razak told a conference in Kuala Lumpur that his government would end rules on foreign investment in most sectors of the economy and would open up the investment management and brokerage industry, as well as property, ending requirements for 30 percent ownership by ethnic Malays.

He also promised reforms of Malaysia's huge government companies such as plantations and property giant Sime Darby, and said they would be forced to sell non-core assets to boost domestic competition in the Southeast Asian nation.

"We have become a successful middle income economy, but we cannot and will not be caught in the middle income country trap," Najib told the conference.

"We need to make the shift to a high income economy or we risk losing growth momentum in our economies and vibrancy in our markets."

The reforms gave the ringgit a small boost and it traded at 3.521 to the dollar at 0500 GMT, up from 3.54 at the open, although data released later showed foreign investors had continued to pull money out of Malaysia this year.

Malaysia is Asia's third most export-dependent nation , seeing shipment slump 26 percent from a year ago as demand for electronics and commodities has been hit by the global downturn. The economy has shrunk 5 percent this year.

Investment flows have dried up and the country has been overtaken by neighbouring Thailand in terms of direct investment since 2001 and portfolio flows turned negative to the tune of 92.3 billion Malaysian ringgit ($26.10 billion) in 2008.

In the first quarter of 2009 they remained negative to the tune of 12.2 billion ringgit, even as investment in other emerging Asian economies has recovered. Malaysia's stock market has risen 20 percent this year, underperforming a 30 percent rise in Asian markets excluding Japan.

"This move will definitely encourage investors to rethink or reconsider Malaysia amid the many choices (in the region) such as Thailand, Vietnam and Indonesia," said Wan Suhaimie Wan Saidie, economist at Malaysia's Kenanga investment bank.

BALANCING INVESTMENT AND POLITICS

Najib who heads an unpopular government and himself has an approval rating of just 45 percent, according to a June poll, had to balance the need for reform to attract diminishing global investment flows against the risk of a political backlash.

That means that he could not formally end New Economic Policy (NEP), the system of economic and social privileges for ethnic Malays who are 55 percent of the population and which has been cornerstone of the country's policies since 1971.

Instead Najib chose to emphasise that he would keep an overall aim of boosting Malays' ownership of the economy to 30 percent from 19.4 percent at present but he placed a new stress on helping competitive Malays, rather than a blanket guarantee.

"Pragmatism requires a focus on substance, not form. The government of Malaysia remains commited to pursue the spirit and substance of growth with equity," Najib said.

Najib leads the United Malays National Organisation (UMNO), the dominant party in the multi-ethnic 13-strong National Front coalition that has ruled Malaysia for 51 years since independence from Britain.

The Front's grip on power was hit in elections in March 2008 when the opposition won over a third of parliament seats, blocking the coalition's ability to change the constitution, and five of Malaysia's 13 state governments, a record haul.

The government ousted lacklustre premier Abdullah Ahmad Badawi and replaced him with Najib who took office in April and has launched a series of liberalisation measures in the services sector and finance that his predecessor had shied away from.

"This is a fundamental shift in the government mindset, rather than going for quantity we go for quality," said James Chin, professor of politics at Monash University in Kuala Lumpur.

"This is also an acknowledgement by the government that we are a trading nation and we live in a globalised world."

(Additional reporting by Niluski Koswanage, Razak Ahmad, Loh Li Lian)