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Malaysia:
Rail deal rankles India, China
By Arun Bhattacharjee
KUALA LUMPUR - Malaysia is playing poker with three aces - palm oil, growing
dollar reserves and new business in euros. Stakes are high, and any slip-up may
land it in trouble.
 For
one, the attempt to play both ends from the middle in the railway deals with
India in the north and China in the south of peninsular Malaysia is becoming
sour, with time wasted and no agreement in sight. The memoranda of
understanding (MoUs) with India's government-owned International (Indian)
Railway Construction Co (IRCON) and China Railway Engineering Corp (CREC) are
still on the negotiating table after two years.
Not a single meter of track has been laid in Malaysia for the high-speed
Trans-ASEAN Railway, although retiring Prime Minister Mahathir Mohamad assured
his Association of Southeast Asian Nations (ASEAN) partners last month of a
railway link connecting Singapore with China's Kunming. While Malaysia haggles
over the price of palm oil price - the currency of payment for the contracts
worth RM18 billion (US$4.73 billion) - Vietnam is ahead in laying tracks for
the Vietnam-Laos-Cambodia sector.
According to the MoUs signed in May 2001, India gets $2.63 billion for laying
double tracks for a stretch of 338.8 kilometers from Ipo to Pedang Besar,
called the Northern Grid, and China $2.1 billion for the southern grid to build
297km from Seremban to Johor Baru in the south.
The glitch involves palm oil and Malaysia's insistence that local firms should
be subcontracted even though, claims one contractor, they have no knowledge of
high-speed railway tracks. Malaysia's KTM-operated trains run at an average
speed of 40 kilometers/hour or less. Malaysia is proposing counter-trade with 8
million tons of palm oil as payment, divided almost equally between India and
China over the next six to seven years.
In an unusual move for a Chinese company, CREC announced through a
diplomatically-couched statement that the deal with China for constructing the
southern grid was not canceled but was taking a long time to reach an
agreement. Both CREC and IRCON feel frustrated, as Malaysia wants to peg the
price of palm oil to its advantage without allowing additional costs to the
contractors. When negotiations started in May 2001, the palm-oil price was
RM750 per ton against the current price of RM1,500. Malaysia expects the price
to firm up about RM1,400. Malaysia produces 50 percent of world's palm oil.
Last year Malaysia exported 10 million tons of palm oil out of 11.9 million
tons worth $5.15 billion, or more than 98 percent.
Scarred by severe acute respiratory syndrome (SARS) and an economic downturn
Malaysia plans to maintain its external reserves around $37 billion, equivalent
to 5.7 months' imports and 4.6 to 5 times the country's short term external
debts. In spite of a better rating by Malaysia's rating agency Affin-UOB for
external reserves growth of $37.5 billion by the end of this year, based on
last year's trade surplus of $14.8 billion (RM 56.6 billion), economic planners
are cautious about trade forecasts.
Its new strategy involves barter trade with palm oil, issuance of Euro Bonds
and increased trading in euros. Bank Negara, Malaysia's central bank, is
optimistic that the lower dollar deposit interest rate of 1.2 percent will
encourage repatriation of export earnings to Malaysia offering 3 percent on
three-month short-term deposits. At the same time exporters are being urged to
trade in euros, although a large segment within the Manufacturers' Association
are not fully convinced about the benefits of trading in euros.
Malaysia is also planning road shows in Europe and West Asia in
September-October to benchmark the country's rating before launching the second
Islamic Bond "Sukuk" for $157 million strictly following Islamic shariya law
and make it more attractive to West Asian investors. Malaysia issued Islamic
bonds worth $100 million last year without success after Mahathir announced his
retirement. Said Dr Jamaludin Jarjis, the second finance minister, "This year's
Islamic bond will be more shariya-compliant and help Malaysia to diversify in
different baskets of currencies to reduce the country's dollar dependence."
The strategy of having debts in US dollars and income in euros appears sound,
though the banks are not totally convinced. They believe it will be difficult
for Malaysia to get out of the strong relationship with dollars as 60-80
percent of Malaysia's reserves are in US dollars and no more than 5-10 percent
in euros or yen.
Most important for Malaysia today is foreign direct investment, as its
export-oriented economy, mostly based on electronic and electrical exports, is
yet to see the light at the end of the tunnel because of the global economic
slowdown, especially in the United States. Its red carpet for foreign direct
investment (FDI) was spread when International Trade Minister Rafidah Aziz
removed all stops mid-June and allowed FDI with 100 percent foreign equity.
Earlier FDIs required 26-30 percent equity to be held by the Malaysian
companies.
Rafida, a former professor of economics in the University of Malay, knows well
the competition Malaysia is going to face in the areas of electronics and
electrical exports in future when China emerges as one of the major competitors
in these fields. Export of electronics and electrical goods are pivotal to
Malaysia's trade prosperity besides palm oil. So far Malaysia has maintained
its lead in spite of competition from Thailand and China.
India is the largest importer of palm oil, nearly 700,000 tons last year. Last
month Indian import of palm oil increased by more than 34.6 percent because of
a delayed monsoon that affected edible-oil crops. The total increase in April
this year was 41 percent over the same period last year. As the natural barter
trade partner for Malaysia, India feels that the progress is stymied because of
minor details that can be sorted out easily if Malaysia is receptive enough.
The Chinese feel the same way.
(Copyright 2003 Asia Times Online Co, Ltd. All rights reserved. Please contact
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