By Anil Netto KUALA LUMPUR - Malaysian Prime Minister Najib Razak's recent announcement that a 100-storey tower will be built in the capital by a government investment fund comes as global liquidity is flooding the region and raises concerns the project could represent the front end of a coming new crisis.
Najib unveiled the plans for the tower, to be known as the Warisan Merdeka, or Independence Heritage, on October 15. Two weeks later, Asian Development Bank chief Huruhiko Kuroda warned of two risks facing developing Asian economies like Malaysia: that the recovery in developed economies could be elusive and speculative capital inflows into developing economies could prove volatile.
The United States Federal Reserve is expected to announce a second round of quantitative easing this week, which could
prompt the flow of even more speculative capital in search of higher yields into Asia’s developing economies.
Last month, the Federation of Malaysian Manufacturers, in a joint statement with its Thai counterpart, expressed concern that "unbridled speculation and inflows of hot money that impact on financial markets will work its way through the real economy to adversely affect output, trade and jobs".
Share prices on the local bourse have rallied to near-record levels. The benchmark FTSE Bursa Malaysia Composite Index, which closed at 1,505.66 last week, is expected to test soon its historic high of 1,524.69. Prices of commodities, including some of Malaysia’s top exports, have also surged, driven by cheap speculative money.
Property prices have rocketed this year in urban centers like Kuala Lumpur and Penang, prompting the central bank, Bank Negara, to state that it would clamp down on any speculation that could lead to a property bubble.
The proposed 100-storey tower, to be built by state-managed Permodalan Nasional Berhad (PNB) - the country's biggest fund manager - next to the Merdeka (Independence) Stadium and the Indoor National Stadium, will easily surpass in height the city's 88-storey Petronas Towers (at 451.9 meters, including spires) and is scheduled to become the second tallest in the world.
Flash back two decades, Malaysia had only just emerged from a recession in the mid-1980s when the government of prime minister Mahathir Mohamad proposed the Petronas Twin Towers. Work began in the early 1990s at a time when the country was enjoying an economic boom, driven by hot money pouring into the region. On their completion in 1998 they were the world's tallest buildings.
Even during the 1990s boom years, there were concerns about who would occupy all the office space created by the Petronas Towers. At that time, office occupancy rates in Kuala Lumpur were well above 90%, the average annual gross domestic product (GDP) growth was over 7%, and the country was regarded as something of a regional economic powerhouse.
Just as the Petronas Towers were completed, the 1997-98 Asian financial crisis struck. With additional space from the towers and other skyscrapers coming online, Kuala Lumpur’s office occupancy rate slumped to just over 80% and dropped even further into the 70% range in subsequent years. In the event, state-owned oil and gas giant Petronas moved its offices into one of the twin towers, while the other tower was gradually occupied by Petronas subsidiaries and other firms involved in the oil and gas sector.
The Petronas Towers' experience was echoed earlier this year with the opening of the world's tallest skyscraper, the Burj Khalifa, in the middle of a financial meltdown in the United Arab Emirates. A couple of years ago, when the Burj was being constructed in the midst of a property boom there, the business press in Malaysia had hailed UAE as a model for Malaysia to emulate.
No longer. Today, Malaysia bears some similarities with the 1990s when the Petronas Towers were mooted. Once again, Malaysia is emerging from a recession. Hot money is flowing back into the region with economic stagnation and more quantitative easing in store for capital-rich developed nations.
But there are major differences as well. This time Malaysia's economic growth has slowed to just over 5% in recent years. Unlike the confident boom years of the 1990s, Idris Jala, a cabinet minister tasked with outlining economic policy reforms, has warned that the country risks a Greece-style economic crisis by 2019 if it doesn't take immediate steps to restructure the economy.
And instead of hordes of foreign investors beating down the door to establish factories and offices, they are generally headed elsewhere in the region where labor costs are lower, such as China and Vietnam. Unlike the pre-1998 near full occupancy of Kuala Lumpur’s office space, the occupancy rate now has only just topped 80% - and this before the mega-tower is built.
Glutinous worries
Once again, there are market concerns of a possible future glut. Like Petronas, PNB is expected to move its offices into the mega-tower when it is completed, but that will leave the investment fund with the task of finding a profitable use for its existing PNB tower in Kuala Lumpur.
Other huge property projects in Kuala Lumpur are also planned. A government outfit, 1Malaysia Development Bhd (1MDB), is bringing in Abu Dhabi's Real Estate and Hospitality to jointly develop a 26 billion ringgit ($8.4 billion) financial district Kuala Lumpur designed to cover 36 hectares. 1MDB will also partner with the Qatar Investment Authority in another large property development project on an air force base in Sungai Besi, part of the federal territory of Kuala Lumpur.
This means an enormous amount of office space will become available at a time when Malaysia's medium-term economic prospects are not exactly bright - even though the property and stock markets may be bubbling now. Though the mega-tower is expected to cost 5 billion ringgit, critics worry that the actual cost could balloon beyond that, as mega-projects often do.
Malaysia aims to reduce its fiscal deficit from 7% of GDP in 2009 to 5.6% or lower this year. The federal government's debt to GDP ratio rose to 53.7% in 2009 - exceeding 50% for the first time in recent years - though most of it was domestic rather than foreign debt. External debt now stands at 34% of GDP. A rising source of financial concern is household debt levels, which hit 76% of GDP last year.
The government knows it can count on the nation's piggy bank - Petronas - to tide it over any immediate economic turbulence. But that insurance policy is faltering. For the year ended March 2010, the national petroleum corporation's profit after tax fell by 23.6% to US$13.1 billion. The fall was driven by an 18.8% drop in revenue to $62.5 billion due to lower global fuel prices. Return on capital employed by Petronas dropped to 24.9% from 36.8% over the same period.
The proposed mega-tower has come under strong public criticism, including on social networking site Facebook. At the time of writing, over 216,000 people have endorsed a "Malaysians Reject 100-storey Mega Tower" Facebook page - an extraordinary number considering it's been only two weeks since it was set up. (To put this in perspective, Najib himself has 456,000 Facebook page "likes" while opposition leader Anwar Ibrahim has just over 200,000 "likes" - but both built up over a much longer period.)
Najib has defended the proposed tower, denying that it would be an economic waste, and he has claimed the construction will benefit many business sectors. "There are many contract works which we can give out to spur economic activities. The area can also become a center of attraction and a business center." He said the project was proposed by PNB, which manages some 150 billion ringgit in funds, rather than the government itself.
PNB was set up in 1978 as a key instrument of the government's New Economic Policy, which aims to promote corporate equity ownership and investment opportunities among bumiputeras, a Malay term used for indigenous people of the Malay archipelago. Under PNB, substantial shares have been acquired in large local corporations from funds provided by the Bumiputera Investment Foundation. These shares, in turn, were transferred to trust funds and sold to the bumiputera public in smaller units.
"I did not ask PNB to undertake the project. It is something which the PNB management wants to see implemented," said Najib.
Critics, however, point out that while PNB is managed by a board of directors, its board of trustees is helmed by Prime Minister Najib and his deputy, Muhyiddin Yassin.
Many Malaysians thought they had seen the last of this fixation with the tallest and the biggest with the end of the Mahathir era - so the general reaction to Najib's announcement was one of flabbergasted disbelief. Opposition leaders have taken the mega-tower controversy to the hustings, especially with two by-elections in constituencies lying in the less-developed states of Kedah and Sabah coming up on November 4.
"Why do you need a 100-storey building to be undertaken by a bumiputera agency?" asked opposition leader Anwar before a dinner crowd in Penang. "This by itself proves beyond reasonable doubt that UMNO [the ruling United Malays National Organisation] leaders are completely oblivious - there's a clear disconnect between the thinking of the cronies and the ruling elite and the sentiment of the Malay masses."
Other parliamentarians have joined in the criticism. "If tall buildings will bring us out of this low-income or low-middle-income trap and make us a high-earning society (as the government hopes), then we should have achieved it because we have the twin towers, which were built years ago, but it didn't happen," said opposition parliamentarian Khalid Samad of the Islamic party PAS.
Anil Netto is a Penang-based writer.
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