Don't let Clob thwart KL's MSCI re-entry Releasing frozen Clob stocks
for trading will also help regain international investor goodwill
Market Matters by Eddie Toh
SO Morgan Stanley Capital International has finally decided to reinstate Malaysia in its widely tracked indices next February, a move that will put the country back on the radar screens of many big foreign fund managers. But the agency has also imposed conditions for the reinstatement: no reversal of Malaysia's market liberalisation and an amicable solution to the saga over Malaysian shares previously traded on Singapore's over-the-counter market, Clob International.
Is the rehabilitation a sure thing? Well, it's almost certain Malaysia will be re-included in MSCI's series of country and stock indices.
For a start, Malaysia is not expected to revert to the ill-advised regime of barring foreign fund managers from repatriating money for 12 months, introduced last September as part of capital controls. This is because the new two-tier exit levy on investments will help Malaysia's goal of attracting long-term funds and stemming the inflow of destabilising hot money. For "old money" or funds pumped into the Kuala Lumpur Stock Exchange before February, the government applies a staggered exit levy on the capital, from 30 per cent to zero on the repatriation of proceeds. That levy will be reduced to zero next month. For "new money" or funds channelled into the KLSE after February, profits are taxed instead -- 30 per cent if repatriated within one year and 10 per cent thereafter.
Unlike the previous one-year moratorium, foreign fund managers will ot breach their charter when they invest in Malaysia under the new guidelines. They can repatriate their "new money" within a year if necessary in the event of redemption by unit holders, and pay the exit tax -- a common feature in many countries. But those who choose to park their money in Malaysia will most likely opt for a lower levy and repatriate the proceeds only after one year. And Malaysia could well absorb any exodus of "old money" come September. Even an outflow of up to US$10 billion (S$16.7 billion) will not cripple the system as Malaysia's foreign reserve has grown to more than US$31 billion. Reflecting the healthier investment climate, foreign funds outflow was only 540.9 million ringgit (S$238 million) between July 17 and Aug 11. In contrast, there has been a cumulative net inflow of RM4.2 billion since March this year.
No doubt, the outflow of "old money" will escalate next month, but inflow of funds is also expected to rise ahead of Malaysia's expected reinstatement in the MSCI indices. With a viable exit tax to manage the flow of funds, a healthy foreign reserve, and the possibility of the inflow even outstripping the outflow as the economy improves, there is little need for further draconian measures. The economy has proven to be more resilient than expected. The official growth rate of one per cent this year now seems overly conservative. The government has also managed to contain inflation and reduce the cost of funds in the banking system. And the KLSE Composite Index is expected to rise in the longer term although there could be weakness in the short term due to the expected pullout of funds next month.
But there is a major factor that may delay or thwart Malaysia's readmission to the MSCI club -- the fate of the 172,000 accounts holding Malaysian Clob stocks worth RM15 billion.
Although three private sector teams have made offers to Clob investors, the Malaysian government must provide a better solution if most of the investors reject the private offers.
In fact, Malaysia can now afford to be more generous and release all the shares to their rightful owners. Besides regaining the goodwill of international investors and guaranteeing a berth in the MSCI, such a move may encourage Clob investors to choose to inject more funds into Malaysian stocks.