Malaysia projects review threat unsettles investors

ANALYSIS - Malaysia projects review threat unsettles investors

Thu May 29, 2008

By Umesh Desai

HONG KONG, May 29 (Reuters) - Weakened Malaysian infrastructure bonds and stocks will have no respite as long as political wrangling threatens key projects, although political expediency and legal hurdles could prevent any new government from taking drastic steps.

Opposition parties won in five of Malaysia's 13 states in elections in March and are demanding a review of vital state projects in a country where big business and politics are closely intertwined.

Prime Minister Abdullah Ahmad Badawi's ruling coalition lost its crucial two-thirds majority in parliament and faces a leadership challenge.

Rating agency Standard & Poor's cut the outlook on Malaysia's sovereign rating to "stable" from "positive" earlier this month, citing political uncertainty.

"There is a lot of talk that some existing contracts may be changed to please the public," said Lum Choong Kuan, head of fixed income research at CIMB Investment Bank Berhad.

The review of the projects come as Malaysia is seeing a revival in foreign investment -- foreign direct investments soared more than two-thirds to $13.7 billion last year -- and it would be politically hurtful to derail that process.

"If the original terms are not adhered to, then future investments in Malaysia will be under pressure and also cause the credibility of the ruling government to be questioned," said CIMB's Kuan.

The Democratic Action Party, which now controls Malaysia's industrial heartland of Penang, and Islamist opposition party PAS, which are now in government in three northern states, said they will review federal projects in their areas.

Experts say project reviews could include changes in the terms of power purchase, altered terms of contracts with water producers and even scrapping of certain projects such as the $8 billion real estate development project in Penang.

Comments on the review, made in March, have hit stocks of companies involved in major state projects, with Equine Capital Bhd (EQUE.KL: Quote, Profile, Research), Gamuda Bhd (GAMU.KL: Quote, Profile, Research) and Scomi Group (SCOI.KL: Quote, Profile, Research) all down between 16 to 55 percent so far.

And analysts say the shares are likely to remain underperformers. Bonds from water company Syarikat BekalanAir Selangor (SYABAS) and infrastructure group YTL Corp (YTLP.KL: Quote, Profile, Research) have also weakened.

While bonds have not shown a sharp reaction, mainly due to poor liquidity, traders say part of the rise in yields is because of worries about possible changes in terms of contracts.

SYABAS 2018 bonds now yield around 5.9 percent, compared with 5.4 percent in early-March. Similarly, YTL Power's 2014 bond yields are up to 4.91 percent from around 4.45 percent.

SELECT PROJECT REVIEW

"They will review the projects but they will not do it in a way that investors will be hurt," said Tan Chong Koay, chief executive of Phiem Asset Management (Asia) Pte Ltd, which has $1.2 billion in assets, more than half in Malaysia.

After the government scrapped a $2.5 billion bullet train plan last month to divert funds to food projects, politics may also decide the fate of other infrastructure spending.

Prime Minister Abdullah Ahmad Badawi said many projects which are under a 5-year, $54 billion development plan are being reviewed but already there is talk some will be dropped.

"Political uncertainty in the air means there is a risk some of the ninth Malaysian Plan projects may not take off," said CIMB's Kuan.

But legal realities carry more weight than political rhetoric, and opposition parties may find it difficult to make drastic changes to existing contracts.

"Courts will uphold the contracts terms and most of the major projects have provisions for arbitration in offshore courts Singapore and London, and the choice of law is also usually not Malaysian," said Malik Imtiaz Sarwar, Kuala Lumpur-based lawyer.

"Those agreements will be difficult to revoke, unless there was corruption or fraud involved," he said.

In the common law system, which is followed in Malaysia, contracts that are illegal or against public policy are not enforceable.

The ruling coalition has had an iron-clad grip on Malaysian politics for the last 50 years and if there is a change in the government, the new leaders would not want to blow their chance of retaining control.

"Both sides of the divide want to show they are capable of pulling in investments -- that will be a major election issue in the next round," said Sarwar. (Editing by Anshuman Daga)